US: Quebec auction expected to settle near the floor price

03 March 2014 20:53 Source:ICIS

Market participants are expecting light demand and a low settlement price for Quebec’s second cap-and-trade auction on Tuesday, the first since the Canadian region carbon programme linked to California’s in January.

Quebec’s ministry of sustainable development, the environment, the wildlife and parks will be auctioning off 1m Vintage 2014 allowances and 1.5m Vintage 2017 allowances. The Quebec floor price is $10.27 tonne of CO2 equivalent (tCO2e), a $1.07/tCO2e discount to California floor price of $11.34/tCO2e. The auction results will be released on Friday.

Traders expect the auction to clear near the floor price given the small volume on sale and unfamiliarity with the Canadian programme.

A broker said California companies, who are expected to be the primary demand drivers, are still unlikely to participate. “It is just cheaper to do it in California,” he said, noting the transaction and administrative costs could discourage participation. “Unless there is a substantial discount, I don’t see why they’d do it.”

Traders said California companies have largely stayed out of the Quebec auctions because of the administrative burdens. A California company would have to open a separate account in the compliance instrument tracking system service (CITSS), which serves as account registry and transaction log, with the primary representative residing in the Canadian region in order to be authorised to take part in Quebec auctions.

As a result, the main buyers are expected to be Quebec compliance entities.

Only three firms – energy companies Shell Energy North America, Valero and Transcanada – have participated in auctions both in Quebec and California so far.

Slow start to Quebec carbon market

Quebec’s cap-and-trade programme had a lacklustre start as in the inaugural auction in December 2013 less than 2m total allowances were sold at the floor price of C$10.75/tCO2e ($10.10/tCO2e). The bidders were 19 – a fraction of the 71 recorded in the latest California auction – as many large financial players were absent ( see EDCM 3 December 2013 ).

The results largely mirrored those from California’s first auction in 2012, which cleared $0.09/tCO2e above the $10.00/tCO2e floor price at the time.

Market participants are eager to see how the second Quebec auction settles after the most recent California one recorded shrinking demand and low prices ( see EDCM 24 February ).

California regulator Air Resources Board (ARB) sold 19.54m Vintage 2014 allowances for $11.48/tCO2e and 9.26m Vintage 2017 allowances for $11.38/tCO2e last week. The auction attracted the fewest qualified bidders ever recorded in an ARB auction, or 71, an 8% drop from the 77 bidders in November. Dan X. McGraw

By Dan X. McGraw