US carbon market: Speculators, future compliance entities adding demand

06 December 2013 16:23 Source:ICIS

A carbon analyst said speculators and future compliance entities may be slightly propping up the price of California carbon allowances (CCAs) by soaking up some of the extra supply at auction.

Due to an allowance oversupply, the US-based analyst said there is not enough natural demand from compliance entities to sell out the supply of allowances at auction. But a handful of companies are seeing the low prices as an attractive opportunity to enter the market now.

“You are seeing it [speculation] more and more,” a carbon broker said. “Some of it has levelled off though.”

It is unclear to what extent speculators and future compliance entities are getting into the California carbon market. ARB only publishes the list of qualified bidders and the percentage of allowances purchased by compliance entities at auction.

Those non-compliance entities can be a mixture of speculators, future compliance entities or companies voluntarily opting into the programme. According to ARB data, they are buying an average of 6.5% of the allowances at ARB auctions.

Over the past year, those entities have amassed 4.9m vintage 2013 allowances and 2.2m 2016 allowances.

Those entities also bought nearly 2m vintage 2013 allowances during the February and May ARB auctions, which posted the two highest settlement prices of $13.62/tonne (€10.07/tCO2e) and $14.00/tonne respectively.

Those allowances are likely to increase in value due to ARB’s rising floor price. Most traders and brokers expect 2016 allowances to trade for more than $13/tonne, making allowances an attractive option for companies who may be speculating or have a future compliance obligation.

Market participants said some companies, such as Vitol, are buying allowances at auction to meet a small emissions obligation but also use the opportunity to purchase future vintages in case the supply-demand dynamic shifts in their favour.

Another broker added a large percentage of auction bidders are compliance entities, but a bulk of the secondary market was entities speculating on the future price of allowances. He said those companies are, however, bringing some additional demand and liquidity to an oversupplied market.

“With speculators and future compliance entities, prices are still near the floor,” the broker added.

Allowances are trading at $11.70/tonne on Thursday, or about a dollar above the $10.71/tonne floor price for 2013, traders and brokers said.

Compliance buying ramps up

An analysis by ICIS-owned Tschach Solutions found future compliance entities in the transportation or oil sectors are also likely buying into the market early. The analysis said those entities are more likely due to the amount of free allowances allocated to public-owned untilities (POUs).

“Some of these companies might face a short position,” the analysis found. “They could have viewed this auction an attractive opportunity to hedge the shortfall at current prices as they remain close to the floor.”

A bulk of the covered entities are in the electricity or industrial sectors for the first compliance period, but the programme will expand in 2015 to include the transportation sector, or suppliers of gasoline, natural gas and other fuels.

That expansion is expected to bring additional demand, but traders and brokers believe the market could still be slightly oversupplied unless companion programs, such as the low carbon fuel standard, fail to live up to their emission reduction targets.

A California emissions trader said the current low prices are making future entities consider getting into the market early. The trader pointed to some energy providers, such as Southern California Gas, as a prime example of companies getting active early in the market.

Southern California Gas, a natural gas provider, has taken part in the last two ARB auctions.

The carbon analyst said larger energy companies, such as Valero, Transcanada, Tesoro and Chevron, are also buying into the market now to hedge costs ahead of their own compliance obligations. Dan X. McGraw

By Dan X. McGraw