US: Increased demand shrinks insured offsets bid-offer spreads

California carbon offsets (CCOs) with invalidation protection are seeing increases on the bid side as compliance entities, specifically fuel suppliers, get more activity in the marketplace, traders and brokers have said.

California allows companies to use offsets to cover up to 8% of their compliance obligations. All offsets can be invalidated up to eight years after being issued by the Air Resources Board (ARB). The period can be reduced to three years if a second verification is done by a different company, creating a so-called CCO3.

Compliance entities can also purchase CCOs with invalidation protection, or a golden CCO.

Over the past two months, the bid price for golden offsets has risen from $10.25/tCO2e to $10.95 while the offer price has stayed relatively stable at $11.25/tCO2e. California carbon allowances (CCA) with a similar delivery have declined 3.5% to $12.52/tCO2e during that same time period.

“There is more interest among compliance buyers,” a broker said of the market. “There is also more competition among sellers.”

Fuel suppliers, who officially joined the programme in January, are seen as the biggest buyers of offsets because of their large compliance obligations and ability to mitigate the risks associated with the products.

Chevron and Valero submitted a majority of the 1.68m credits surrendered during the first compliance deadline. Large investor-owned utilities, such as Pacific Gas & Electric and Southern California Edison, are also buyers of the commodities.

A second broker said there is growing strength in the offset market because of the new entities and low amount of supply in the secondary market.

“There is not as many offsets as demand,” the broker noted.

The ARB has issued 17.9m offset credits during the programme’s history, but roughly 16.1m of those credits should still be valid for compliance. A majority of offsets are likely sold as CCO8s or CCO3s because of the requirements to sell them as golden, or insured products.

Fourth product becoming more common

Traders said the market is also becoming more comfortable transacting CCOs with a second verification completed but have not been issued by the ARBs as CCO3s. The product is generally referred to as a CCO8 convertible to a CCO3.

“That is all we do now,” a trader from a trading house said.

Those contracts had been valued in the mid-$9.00/tCO2e range, but market sources said those contracts are now approaching the $10.00/tCO2e price level. The market appears to be valuing those offsets as CCO3 despite the uncertainty about their issuance as CCO3s by the ARB.

The ARB has issued nearly 730,000 CCO3 this year, and the additional supply could explain the lower bid prices for CCO8 and CCO3 contracts. CCO8s are valued in the $9.00-9.70/tCO2e range while CCO3s are falling into the $9.35-9.99/tCO2e. Both are slight decreases from earlier this year. Dan X. McGraw