Fourth Auction Preview

California is gearing up for its fourth auction in a context of bearish sentiment and regulatory uncertainty. Prices on the California market dropped below $14/ton late July for the first time in months, and CCAs have been trading on ICE between $ 13.70-13.80 a ton since then with low volumes. Friday’s auction will see 13.86 million V13 and 8.56 V16 allowances offered for sale.

The market’s bearish sentiment is likely driven by the regulatory changes proposed by the Air Resources Board on July 18, which could bring more free allocation to industry and natural gas emitters than previously expected. While the proposed regulatory changes don’t alter supply and demand fundamentals, they do signal that a number of large emitters – natural gas suppliers – may not need to participate actively to the traded market to be in compliance, lowering demand and liquidity.

Most immediately, this also means a number of potential buyers will abstain from participating to this upcoming auction since they might not need to buy allowances for their future compliance. The quiet summer and thin market could also discourage some financial players from investing in allowances as prospects for returns are limited with flat prices and low liquidity.

However, we don’t expect a price collapse at the auction – large buyers from the power and oil sector will continue to buy allowances, keeping prices from tumbling too low. We expect the V13 auction to be fully subscribed and clear around $13.5 a ton. The V16 (‘future’) auction, on the other hand, will likely suffer from the regulatory uncertainty and remain undersubscribed. We expect they will clear at the reserve price of $10.71.