ICIS Analysis

California Could Benefit From Unsold Allowances

SAN DIEGO, June 24, 2016 /PRNewswire/ --

California's cap-and-trade program experienced a shock after only 11% of the offered volumes in the May auction sold. The auction brought in a mere $10m to state coffers, causing legislatures to express concern about the health of the current carbon market.

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ICIS, a global carbon market analytics firm, examined the potential impacts of how the 38.6m unsold California state-owned allowances from the first two auctions could re-enter the market depending on the auction results in the second half of 2016. That analysis shows California could profit from the low current demand if market participants returned to future California-run auctions. The auction revenue would increase by $41.6m over the next three years, but it may rise by $148.7m if demand at the next two auctions remains low.

Those higher revenue amounts are the result of an escalating floor price in the cap-and-trade market and the state-mandated delay of unsold volume.  All number are in relation to the floor price of the certain year. Potential price increases above the floor price could lead to even higher revenues. However, in the short term, low auction demand has trimmed nearly $599m from the state's cap-and-trade auction revenues. There is a risk that the remaining two auctions could also see low demand as prices remain low on the secondary market.

In an extreme scenario, California auction revenue could decline by $1.42b in 2016 if a total of 56.4m state-owned allowances went unsold over the August and November auctions. The state could eventually recoup that money if demand returned to future auctions. Unsold state-owned allowances return to the market after two consecutive auctions sell out. That unsold volume cannot exceed 25% of the volume already designated for that auction under Air Resources Board (ARB) rules. Therefore, if the final two auctions sell out, it will take at least until the end of 2017 to return all unsold volumes to the market. Together with the future vintage allowances that will only return in 2019, the state would bring in $640.5m during that three-year period, according to ICIS analysis.