US: Auction reserve price can increase by less than 5%, spokesman says

The auction floor price for carbon allowances can rise less than 5% per year if the rate of inflation finishes as a negative number, an Air Resources Board (ARB) spokesman said.

The ARB, the cap-and-trade regulator, increases its minimum auction floor price by 5% plus inflation every year. The current floor price is $12.10/tCO2e, a $0.76/tCO2e increase over the 2014 floor price (see EDCM 2 December 2014).

An ARB spokesman said the floor price could increase by less than 5% if deflation occurs over the 12-month period that ends in October. The ARB’s regulation does not specifically note what would happen in the event of deflation in the US marketplace.

“If CPI is negative, it is possible the increase could be less than 5%,” the spokesman said.

January’s rate of inflation was -0.1%, leading market participants to raise concerns about how it might impact the future floor price and prices on the secondary market. February’s rate of inflation increased slightly to 0%. The March inflation rate has not been released yet.

Some market participants earlier this year questioned whether the floor price was capped at 5%, meaning the floor could not dip below 5% per year even if deflation occurred. Others, however, said they read the regulation to mean the floor price could rise less than 5% per year if deflation happens.

The floor price only applies to the allowances sold during ARB-run auctions, meaning over-the-counter trades or allowances sold on the Intercontinental Exchange could be sold underneath that floor price.

However, current vintages have not been sold below the current floor price before, market participants said. Traders and brokers said buyers often evaluate the value of future allowances based on projected prices.

With the current rate of inflation, the 2016 floor price would rise to $12.71/tCO2e. Many market participants expect the floor price to rise to more than $12.80/tCO2e, or roughly a 5.78% increase over this year’s floor price. Dan X. McGraw