CCA Optimism Reflected in Q3 Auction Results

Strong California carbon auction results have boosted CCA prices. The Aug 20 CCA quarterly auction settled at $28.76, up 11% from last auction and was significantly oversubscribed. This marks a major shift from the prior auction in May, where it was undersubscribed and settled at the floor price of $25.87.

The May sale had also seen the lowest bid-to-cover ratio in five years at 0.86, but bidders returned this month and the August cover ratio (total qualified bids divided by total allowances available for sale) was 1.45, just shy of the long-term average.

Compliance entities accounted for nearly 85% of the buying, again in line with the historical average.

The auction’s clearing price represented a 29 cent premium to the front-month August CCA price on ICE Futures on August 19, the day before the sale, and was 10 cents above the same contract’s closing price on August 20. This compares to a clearing price discount of $1.09 to the front-month future price in the May 21 sale. Since the auction, CCAs have trended higher with December futures pushing above $29 for the first time since April with a nearly 50% increase in trading volume.

These results reflect the fact that California is moving towards extension and tightening measures that could drive the price towards the $60.47 tier 1 price in the coming years, combined with the market's structural reserve price (floor support) that adjusts higher by 5%+CPI annually.

CCA Current Landscape:

• CCAs at $29.50 today.
• Reserve price at $25.87 (10% lower) tried and tested mechanism.
• Reserve adjusts higher by 5%+CPI per year, $28 next year, just 5% below entry.
• Policy catalyst: California moving to extend program this year.
• Recovery target of $44 (~50% higher) and tier 1 target of $60.47 (105% higher)
• Downside structural support – Inflation+5% - High return potential

Up next, California lawmakers are pushing to advance a bill to extend the cap-and-trade market beyond 2030, before the legislative session ends on September 12. There were a few bills circulating with extention languange but it seems like the most likely route for extension approval is Assembly member Irwin's amended AB 710, according to Politico.

These legislative efforts are supported by a broad coalition of business and environmental interests, which wrote a letter the day of the auction expressing their strong support for the extension of the program and resumed rulemaking thereafter.

"Uncertainty about the Cap-and-Trade Program is harming California by foregoing revenues that would have otherwise been used to lower utility bills for ratepayers and directly invest into communities.

We support a strengthened Cap-and-Trade Program because restored program certainty will further drive clean investments into California and uphold the state as a global economic powerhouse.

Doubling down on California’s successful Cap-and-Trade Program is the smartest way to tackle the climate crisis by prioritizing cost-effective achievement of California’s climate targets, making California more affordable, and supporting California communities.

The California legislature should act as soon as possible to extend the Cap-and-Trade program this legislative session."

See full auction results here.

Carbon Market Roundup:

The weighted global price of carbon was $51.96, up 1.2% week over week. EUAs were up 0.6% over the week to settle at €72.99. UKAs trended 1.8% higher to £53.14. CCAs were up 2.5% at $29.50. RGGI posted a 4.4% gain at $22.97 and WCA was up 0.2% at $63.15.