Quebec’s first auction took place on Tuesday, December 3rd and results were published on Friday, December 6th. The auction regulations are largely similar to California’s, and this was the sole auction where only Quebec allowances were offered for sale, to the benefit of Canadian-based entities only. Starting in 2014, California and Quebec will hold joint auctions where allowances from both jurisdictions will be offered for sale.
Quebec’s December auction saw 1 Mt of V13 allowances sold, 34 percent of the 2.97 Mt offered for sale, at the reserve price of CAN $10.75 (US $10.10). The take up for V16 allowances was even lower, with 1.7 Mt sold, only 27 percent of the total 6.32 Mt offered for sale. The low interest in Quebec V13 allowances came as a surprise as many participants saw a potential upside price risk due to the uncertainty surrounding any first auction – which didn’t materialize. We discuss below potential explanations for the low participation.
The low take up rate of V16 allowances, on the other hand, was to be expected, since the volume offered was large compared to current year emissions. V16 allowances offered for sale amounted to over 25% of covered emissions in 2013, and therefore were unlikely to be absorbed by current participants.
The Quebec market has been ramping up slowly overall, with over-the-counter transactions few and far between. This is to be expected with a small market, only a few large players and a generous free allocation. Linking to the California market is therefore an important step for Quebec, which will open access to a larger, more liquid secondary market and more anonymity in the primary and secondary market.
Industrial emitters dominate
In Quebec, 95 percent of the electricity is generated from hydropower, so that the power sector has virtually no emissions, leaving almost exclusively industrial emitters in the first compliance period. The industrial sector emitted a total of 23.2 Mt in 2011, with aluminum companies making up a quarter of the sector’s emissions, followed by pulp & paper, refining and cement according to data provided by our partners in Quebec, EcoRessources (see Figure 1.)
Figure 1. Industrial Emissions in Quebec
The program covers 91 emitters in total, but many of these facilities are very small emitters, leaving only a dozen covered emitters likely to participate actively in the traded market. Just like California, the largest emitting sector is the transportation sector (35 Mt) and natural gas (7 Mt), and the bulk of the emission reduction effort will really start in the second compliance period, in 2015.
While Quebec has a more aggressive emission reduction target than California, of 20 percent below 1990 levels by 2020, EcoRessources forecasts the first compliance period will also be overallocated. The Quebec allocation formula is somewhat more generous than California’s, and it is quite possible that some industrial emitters have more permits in hand already than they need to cover their 2013 emissions.
Some surprising no-show
Nineteen bidders participated in the auction – Figure 2 provides a breakdown of the number of potential bidders by sector. The vast majority of bidders came from the industrial sector, mostly refineries, metals (steel) and cement. Surprisingly, aluminum companies did not participate – they constitute the largest emitting sector in QC, and their absence likely contributed to the low take-up rate of allowances. Even in the cement sector, only two of the largest four cement plants joined the auction. All three large refineries participated.
It is unclear whether aluminum facilities did not join the auction because they didn’t need the allowances or because they preferred to wait for the California auction. One could speculate that large emitters would rather wait for the joint auction, where their demand is less likely to drive prices up because it will be lumped together with that of many other large emitters from California.
Another absence worth noting is that of fuel distributors – none of the large gasoline and natural gas distributors participated in the auction, indicating that these entities have not started banking yet for the second compliance period. And finally, no financial player joined the auction, not even the Canadian bank that has bid in California auctions in the past.
The absence of many large emitters, fuel distributors and financial players altogether explains the low take up rate of V13 and V16 allowances.
A Question of Timing
It’s also worth noting that Quebec does not have a partial annual compliance requirement. California requires its emitters to surrender 30 percent of the previous year’s emissions on an annual basis, and emitters are left to make up the difference at the end of the compliance period. In the absence of such an annual obligation, Quebec emitters are not required to surrender any allowance until November 2015, which probably also explains the lack of interest in this week’s auction. We expect to see more interest from Quebec emitters in the joint auctions starting next year.
What to expect from the joint auctions?
The next auction will likely take place in May 2014. The February auction should be simultaneous but not on the same platform – see Table 1. for the full 2014 auction schedule.
Table 1. Auction Schedule for 2014
Source: California Air Resources Board.
Note that “Reserve Sale Events” date refer to the sale of Price Containment Reserve Allowances, which will be offered for sale at a price ranging from US $42-$53, and therefore are not expected to see any buyers.
Auctions going forward will see CA and QC allowances offered for sale jointly, on the same auction platform. The reserve price will be US$11.34 (CAN $12.09) in 2014 for both jurisdictions. (If Quebec was going it alone, the 2014 reserve would be around CAN $11.38 (US $10.67) for QC allowances, but the regulation stipulates that the common reserve price will be set on the highest of the two reserve price based on the exchange rate at that time, which means the CA reserve price will set the floor for both jurisdictions). Allowances from either jurisdictions will be fully fungible starting January 1st, 2014 and can be indiscriminately traded, banked, and retired for compliance in either jurisdiction.