US carbon auctions signal bearish pressure on prices ahead
Bearish signals emerged from the latest round of carbon allowance auctions in the US, with markets on the East and West Coast facing increasing risk of a loosening balance.
The second ever auction for Washington state’s cap-and-invest program cleared at $56.01 per metric ton, triggering the Allowance Price Containment Reserve, a mechanism that responds to unexpectedly high prices. This will see more allowances auctioned in the summer, placing downward pressure on prices.
Meanwhile, prices settled at $12.73 per short ton in the latest quarterly auction for the Regional Greenhouse Gas Initiative, which covers power sector emissions in the Northeast. Lower gas-fired generation compared to last year and Virginia shifting a step closer to exiting – a move that could shrink the program’s cap by 30% – are weighing on the market.
Washington held its second carbon allowance auction at the end of May, announcing the results on June 7. The price settled at $56.01 per ton, lower than the $61/t seen in the secondary market but higher than the $48.5/t clearance price at the February auction.
The cover ratio for the 2023 vintage, which represents the ratio of total bids to allowances offered, was 1.95, lower than the 2.97 seen in the first auction. The drop likely reflects less urgency to buy allowances now as prices in the run-up to the auction suggested the Allowance Price Containment Reserve, or ACPR, would be triggered, causing additional volumes to be sold from the market’s reserves later this year.
Indeed, with the APCR threshold having been hit, 1.054 million extra allowances will be sold in August – 0.527 million at the ‘Tier 1’ trigger price of $51.90/t and 0.527 million at the ‘Tier 2’ trigger price of $66.68/t. The allowances from the APCR auction will not be permitted to be resold. The additional supply will likely hold the market back from returning to the record $71/t price level reached in mid-April.
Still, looking beyond the near-term bearish risks, the prospects for Washington’s carbon’s market are fundamentally bullish thanks to a high annual reduction factor of 7% for the program’s emissions cap and a lack of surplus allowances. In addition, the market adjusts the supply of allowances downwards if carbon offsets are used to cover emissions instead, ensuring supply remains within the cap.
The Regional Greenhouse Gas Initiative, better known as RGGI, held its second quarterly auction of 2023 on June 7, the results of which were announced on June 9. A total of 22 million allowances were sold, bringing in $280 million. The allowance price rose 2% from the February auction to $12.73 per short ton, although this was below the $13.66 per short ton seen in the secondary market on the day of the auction.
The states who are members of RGGI will meet this summer to review the program’s design. They will confirm the annual reduction factor going forward, adjustments to price stability tools and protocols around the use of offsets – among other things. The reforms will be bullish for allowance prices if RGGI increases the price floor and embeds an inflation-pegged design, or establishes a more ambitious linear reduction rate in the emissions cap.
Uncertainty continues to linger over the market as the inclusion of Pennsylvania and Virginia remains unresolved. Pennsylvania has the highest emissions across the states included in RGGI but has been sitting out of permit auctions due to legal challenges over its membership. Meanwhile Virginia, which has the third-highest emissions, is on the brink of exiting the market. The Virginia Air Pollution Control Board voted to leave RGGI on June 7, removing one more obstacle for the state’s departure.
