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Confidence felt further down the forward curve with cap-and-trade extension secured

July 24, 2017 by Ronjoy Bezbarua

Spirits were high on California’s cap-and-trade market last week as lawmakers finally approved a bill to extend the program through to 2030. Leaving much in the capable hands of ARB to finalise, AB398 will continue the current program, enabling allowances brought in current vintages to be used for future compliance. Perhaps one of the greatest deviations to ARB’s current program, the new bill will set a 4% offset limit from 2020 to 2025, increasing to 6% through to 2030 with a minimum requirement of no more than 50% offset usages from credits generated out of state.

Unsurprisingly market prices reacted sharply to news from the State Capitol. The current benchmark gained USD 0.19 in the wake of the vote on Tuesday. Prices maintained a midweek high of USD 15.30 on the current front contract and USD 15.45 on the current benchmark before falling off on Friday by USD 0.15. Price movements were consistent across vintages and deliveries.

Less volatile in nature, CCO prices climbed throughout the week to assume a reasonable discount factor to the CCA. At close of play on Friday, the CCA-CCO price spread sat at USD 1.90 between the Dec 17 benchmark and brokered Golden CCOs. The new bill, however, raises fresh questions over the supply-demand balance of California’s offset market and the pricing of home grown offsets vs out-of-state.

Despite the week’s prices swings, trading activity was relatively quiet compared to weeks gone by. A total 3,645,000 tons were traded across all options. With eyes on the new month’s front contract, trading commenced on the Aug 17 contract with 130,000 tons exchanging hands. The spread of traded was relatively diverse through the week. 65% of contract concentrated on the current vintage whilst 28% was accounted for by 2018s and 6% for traders looking further ahead into 2019. The current benchmark saw the highest trade of 1,748,000 tons whilst Dec 18 also saw healthy attention.

Open interest creation continued to see gains with an overall positive net change of 1,343,000 contracts. Future deliveries saw higher changes with the Dec 18 seeing the highest gain of 835,000 contracts. Jun 17, Aug 17 and Sep 17 saw a combined net change of 442,000 contracts.

Another week passed without trade on Ontario’s carbon market. With policy sentiments heavily influencing California’s carbon market, Canadian participants appear to be hesitant on current pricing signals that have seen CCAs hovering closer to 2019’s expected price floor than this year’s floor price of USD 13.57. At the close of trade on Friday, ICE prices displayed a value of CAD 19.19 for OCA’s benchmark contract.

Billy Hamshaw (billy@californiacarbon.info)

Ronjoy Bezbarua (ronjoy.bezbarua@californiacarbon.info)

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