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Looking ahead: Ontario state of surplus

April 17, 2017 by Ronjoy Bezbarua

(CaliforniaCarbon.info, Apr 17, 2017)

Ontario which had an impressive performance for its first auction has seen the prices of its allowances as well as market confidence rise. California Carbon recently had a webinar on April 12 which had discussed in detail the possibilities and scenarios which can result from the auction performance. An important part was concerned with the different market surplus scenarios arising later for the year ahead.  To recap, Ontario’s inaugural cap-and-trade auction held last month on March 22, 2017 got off to a strong start with a full subscription for the Current Auction of 2017 vintage allowances. A bid-to-cover ratio of 1.16 was observed, clearing all 25,296,367 allowances on offer. The auction cleared at CAD 18.08, CAD 0.01 above the Auction Reserve Price. The advanced auction witnessed a lower turn out of 26% as 812,000 of the 3,116,700 allowances for the 2020 future vintage were sold.

Surplus Scenarios for the year ahead- Considering all major possibilities, we had come up with the following scenarios for the year ahead-

 

1. Zero Balance for Ontario-

 Zero

2. If the Ontario market does not link with California-

unlinked

3.  A zero balance WCI situation- 

Zero

4. If all remaining auctions are fully subscribed-

Fully subscribed

 

As we analyzed each situation, there were quite a few conclusions we we could draw from them,

  • Ontario is expected to be a net buyer
  • Entry of Ontario into the WCI in 2018 shifts the expected shortage triggers by a year
  • A total of 130-150 million allowances are expected to carry over from 2020
  • Allowance prices are projected to increase significantly as the cumulative shortage is realized in 2024
  • Anticipating this shortage early and acting on it can greatly minimize cost of compliance
  • Auction results only cause short-term fluctuations and over the next few years the market is fundamentally tied to the floor
  • Positive results for ARB in the Cal Chambers challenge removes the biggest threat to auctions. As the extension of the cap-and-trade program becomes more definite, auctions should start clearing fully as market expects shortage in the long run

Californiacarbon.info will be presenting an updated model on 19th April at the NACW Conference which is going to be held at the InterContinental San Francisco, 888 Howard Street (corner of 5th and Howard), San Francisco, California 94103

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