Trading on California carbon allowances that companies can use beginning in 2016 surged after the state sold out of the permits for the first time.
Futures contracts for a record 1.83 million 2016 allowances for December 2015 delivery cleared today on the IntercontinentalExchange Inc. (ICE:US), settling at $12.50 each, Brookly McLaughlin, a spokeswoman for the exchange in Atlanta, said by e-mail. The previous high was 960,000 allowances on May 21.
“There is now conviction that this program will be here for a while,” Lenny Hochschild, managing director at the White Plains, New York-based environmental broker Evolution Markets, said by telephone.
California’s Air Resources Board sold all 9.56 million permits for 2016 at $11.10 each during an Aug. 16 auction, 39 cents above the clearing price of all previous sales, the agency said in a report on its website today. Each credit allows the release of a metric ton of carbon.
The board received 1.69 bids for every allowance offered, marking the first time that demand for advance permits exceeded supply since the state began capping emissions last year, creating the world’s second-largest carbon market.
California established a cap-and-trade program in an effort to cut greenhouse-gas emissions about 15 percent by 2020. The air board indicated in meetings this summer that it plans to extend the program beyond 2020.
Under the system, the board issues a capped number of allowances through a combination of free allocations and quarterly auctions. Companies must obtain enough permits to cover their emissions as the pool gradually shrinks through 2020. Those with more than they need can trade the excess.
The sellout for 2016 permits “really shows that these companies, probably the big oil companies, are preparing for the longevity of this market,” Emily Reyna, senior manager of partnerships and alliances for the Environmental Defense Fund, said by telephone from San Francisco.
The board also sold allowances that can be used as early as this year, known as “Vintage 2013” permits, for $12.22 each during the Aug. 16 auction. That was more than a dollar below analysts’ forecasts and the lowest settlement for Vintage 2013 permits since the state’s first auction in November.
Futures based on 2013 allowances have slumped to the lowest level this year as the board considers a plan to hand out more free permits instead of selling them.
“It certainly appears that the market is bearish Phase One,” Hochschild said.
The 2013 allowances were expected to go for about $13.25 a ton, according to a July 31 forecast by Bloomberg New Energy Finance, which projected $14.12 a ton in May. The state received 1.62 bids for every 2013 permit for sale, the lowest demand in three auctions, the board’s report showed.
Futures contracts based on 2013 allowances for December delivery dropped 10 cents to $13.25 a ton at 4:34 p.m. New York time, the lowest since Dec. 10, according to data compiled by CME Group Inc. (CME:US)
Units of BP Plc (BP/), Chevron Corp. (CVX:US) and Exxon Mobil Corp. (XOM:US) were among the companies qualified to buy permits in last week’s auction, a report posted on the state Air Resources Board’s website today showed. The agency doesn’t disclose the names of winning bidders.
During the auctions, companies submit confidential bids for the number of allowances they want at a specific price. The highest bidder is awarded permits first, then the second-highest and so on until the all of the permits for sale have been called for. Then all bidders pay the price of the lowest winning offer.
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