US: Golden offsets rising as CCAs stagnate

California carbon offsets (CCOs) with protection against invalidation are rising on the secondary market because of increased demand from compliance entities and the potential for a shortage ahead of the November compliance deadline.

California’s Air Resources Board (ARB), the cap-and-trade regulator, issues credits for projects that fit one of the five approved protocols. The credits can be used to cover up to 8% of a company’s compliance obligation.

Market participants price the credits primarily based on their invalidation risk, which can stretch to eight years. CCOs with an eight-year invalidation period (CCO8) are the cheapest, while credits with protection against invalidation, known as Golden CCOs, are the most expensive.

CCOs with a three-year invalidation period (CCO3) are usually valued closer to the CCO8 than a Golden CCO. Since February, the three offset products have been valued in the $9.85-11.10/tCO2e range.

Golden CCOs have increased steadily since February while California carbon allowances (CCAs) have declined significantly following the February auction. Front-month Vintage 2015 CCA prices have stagnated recently in the $12.44-12.52/tCO2e range.

Brokers said Golden CCOs are currently valued around $11.20-11.30/tCO2e, or roughly a 9-10% discount from current vintage allowances. Some brokerage firms reported selling Golden CCOs for $11.35/tCO2e earlier this month.

For perspective, Golden CCOs were valued at $11.13/tCO2e in early February, or roughly a 13% discount from CCA prices at the time.

“The spike in Golden CCO prices is largely due to low issuance volumes,” an offset developer said. “I think buyers are now beginning to see that for themselves.”

A compliance entity said the rise was the result of decreased issuance volume.

Shortage possible

Offset issuance for 2015 is actually up 10% year over year, but developers are largely referring to the rate of issuance in reference to total demand. The current pace of offset issuance could conceivable leave the market undersupplied for the total possible demand.

Total offset demand is estimated around 26m depending on the 2014 emissions total. The cap-and-trade programme has issued 18.9m offsets so far, and based on the average monthly issuance, the number could climb close to 23m before the November deadline.

“[Compliance entities] are running out of time,” a trader at a trading house said. “I think they are just beginning to realize that.”

A majority of the credits awaiting issuance are for early-action projects, and the ARB is not prioritizing approving those projects before the first full compliance deadline, sources said.

Large compliance entities, who can manage the invalidation risk more efficiently, are also likely to buy a large share of the issued offsets, meaning small- to medium-sized entities may struggle to find available supply.

Several brokerage firms have mentioned the difficulty of finding offset supply in recent months. Traders said that may continue unless offset demand declines or issuances rise. Dan X. McGraw