Bloomberg News

Rule Tweaks May Dissuade California Carbon Bidders, RBC Says

October 29, 2012

Tweaks to the rules governing the California carbon market may dissuade bidders in the state’s first auction next month, said a trader at RBC Capital Markets.

California’s air resources board on Aug. 17 suspended a rule requiring companies to pledge annually that they haven’t engaged in “shuffling” electricity resources to comply with state emissions limits. The board may propose regulatory amendments by the middle of next year to change supply of free allowances to factories at risk of shifting their emissions to regions outside the state, according to a Sept. 20 statement on the board’s website. The market starts Jan. 1.

“Here we are a month or two away from the market’s start and we are relaxing the rules,” said Anthony D’Agostino, director of emissions markets at RBC. “I don’t see where the demand for the auction is going to come from. If they start changing rules, it gives traders pause.”

California carbon allowances for December 2013 have dropped 35 percent since July, when Bloomberg started tracking data from brokers. California’s first auction of permits on Nov. 14 may cause prices to fall by offering too many too quickly, Bloomberg New Energy Finance said last month.

The state Air Resources Board on Nov. 14 will sell at least 21.8 million allowances to be used during the first compliance phase of the cap-and-trade program, designed to help curb California’s greenhouse-gas emissions by 2020 to 1990 levels. The agency will also offer about 39.5 million tons of permits for the second compliance phase beginning in 2015.

“The first time covered entities need to surrender allowances for compliance is November 2014,” D’Agostino said Oct. 25 from Cincinnati, Ohio. “Market participants would rather not tie up capital.”

D’Agostino said trading in the secondary market was sporadic.

‘Absolutely Nothing’

“We’ll have two-to-three days where absolutely nothing trades,” he said. “Most trading is being done by a few financial players and the trading arms of energy companies.”

The people trading appear to be testing the market before the sale rather than trading for compliance, D’Agostino said.

Volumes are low prior to the first sale partly because most allowances are being allocated free of charge, he said.

“There’s not a lot of trading to do. I doubt it will be oversubscribed and it may be under subscribed,” he said.

RBC plans to participate in the auction, he said. The sale price may turn out at about $12 a metric ton, he said.

That’s compared with prices last week of $12.88 a ton, according to data from brokers compiled by Bloomberg.

Prices for 2015 permits will reach $10 a metric ton should allowances go unsold in the November auction, according to Bloomberg New Energy Finance. California lawmakers, who are counting on at least $660 million in revenue from auctions held in the 2012-2013 fiscal year, may “miss that mark,” New Energy’s research showed.

Carbon in Power

Some electricity generators may buy in the auction to cover sales of power, which is sold ahead of generation, D’Agostino said.

“The forward power prices already have carbon built into them,” he said.

Demand for greenhouse-gas offsets in California is low partly because of the regulator’s ability to revoke credits once they have been issued, D’Agostino said. Banks and others “don’t like to trade that stuff,” he said.

“The buyer liability issue has definitely slowed volumes down,” he said. “It’s been super illiquid.”

It’s possible that insurers will be willing to underwrite the risk of credits being revoked after issuance, which would probably boost demand, D’Agostino said.

The state in January is set to create the world’s second- largest carbon market, behind the European Union’s emissions trading system.

To contact the reporter on this story: Mathew Carr in London at

To contact the editor responsible for this story: Lars Paulsson at

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