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News Update
- Market in shock, plummets after WA ECY APCR announcement in wake of Q3 auction results. Washington’s third cap-and-invest auction saw all the 8.6 million allowances sold. In the August auction, 7.3 million (85.46%) of the total 8.6 million went to compliance entities, leaving 1.3 million (14.54%) for speculators compared to 7.7 million (89.88%) and 868,802 (10.12%) respectively in the previous May auction. The August auction opened with a floor price of $22.20 and settled with a clearing price of $63.03, closing $7.02 above the May auction clearing price of $56.01. By settling above the Tier 1 trigger price of $51.90, Washington DEP will host its second APCR auction on November 8th. The shocking news came from the decision to offer 5 million allowances for sale compared to the August reserve sale that had only 1,054,000 equally split between Tier 1 at $51.90 and Tier 2 at $66.68. The 5 million allowances will all be offered at $51.90. Spot prices dropped by approximately $8 on the day of the announcement from $66 to $58. Prices on September 7th fell further, valued as low as $51.60 before rebounding back over the Tier 1 price of $51.90 to $53.00.
- Washington senator talks bill to cut WCA costs. Following the release of the Q3 WCA auction, state senator Mark Mullet spoke of plans to introduce a bill intending to lower WCAs prices. The bill would adjust the compliance schedule and increase the available APCR allowance bank to lower future auction settlement prices like ones seen in the California-Quebec market hovering around $35.00 to $36.75.
- Washington announces October to make preliminary decision about linkage. Coinciding with the release of the auction results, ECY stated after beginning analysis of the statutory criteria for linkage in Spring of 2022, that ECY director, Laura Watson, will make a preliminary decision about whether Washington will pursue linkage. ECY also mentioned due to California being roughly six times the size of Washington, “prices in a linked program will likely align with prices in the larger market at the time of linkage”.
- Washington is considering GHG buying limit adjustment. The state of Washington prevents sources covered by the state's carbon market from purchasing more than 10% of the allowances offered at any particular auction, while California's program employs a much looser 25% limit. Policymakers stated the changes are likely to be revisited next year alongside linkage considerations.
- Nodal launch Washington Carbon & CFS futures. Nodal, with developer IncubEx, added Washington Carbon Allowances (WCA) vintage specific and Washington Clean Fuel Standard (CFS) futures contracts to the trading platform on August 11th. The new contracts appear alongside the existing WCA futures and option contracts listed in December 2022 and January 2023.
Auction Update - August 30th
The Washington State Department of Ecology (DEP) released the results from the state’s first Cap-and-invest auction:
- The settlement price for the auction was $63.03 per MT CO2e at a 1.79 bid-to-cover ratio.
- This auction reported 53 qualified bidders.
- Financial participation stood at 14 entities.
KEY STATS:
Auction #3 – Key Statistics
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Clearing Price
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$ 63.03
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Floor Price
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$ 22.20
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Bid Ratio
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1.79
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Allowances Offered
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8,585,000
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Allowances Sold
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8,585,000
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HHI*
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623
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Qualified Auction Bidders
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53
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APCR Trigger Price (Tier 1 / Tier 2)
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$ 51.90 / $ 66.68
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* Herfindahl-Hirschman Index (HHI) ranges from 0 to 10,000. A lower number indicates a higher level of competition, a higher number indicates greater market concentration among fewer entities. |
AUCTION COMPARISON:
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Auction #2
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Auction #3
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Auction Clearing Price
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$ 56.01
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$ 63.03
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Floor Price
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$ 22.20
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$ 22.20
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Qualified Bids
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15,367,150
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16,740,750
|
Allowances Offered
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8,585,000
|
8,585,000
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Allowances purchased by Compliance Entities
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7,716,198 (89.88%)
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7,336,741 (85.46%)
|
SUMMARY OF AUCTION:
Of the 53 qualified bidders, Washington’s third cap-and-invest auction saw all the 8.58 million allowances sold. In the August auction, 7.3 million (85.46%) of the total 8.58 million went to compliance entities, leaving 1.3 million (14.54%) for speculators compared to 7.7 million (89.88%) and 868,802 (10.12%) respectively in the previous May auction.
The August auction started with a floor price of $22.20 and closed with a clearing price of $63.03, settling $7.02 above the May auction clearing price of $56.01. By settling above the Tier 1 trigger price of $51.90, Washington DEP will host its second APCR auction on November 8th, offering 5 million allowances for sale.
In the August auction, 3 entities were first time auction participants: The City of Enumclaw, DTE Energy, and REC Solar Grade. There were 11 entities who did not participate in the August auction who did participate in the May auction. In addition, there were 5 who participated in the initial February auction and the most recent August auction but did not participate in May.
Washington’s auction results shocked the market as Vintage 2023 allowances for September delivery plummeted, valued at just $55.00 while closing at $58.00 in the afternoon, an unexpected drop from the $65.75 price seen the previous day. As of Thursday morning, prices continued to drop with trades opening at $53.00 and $54.00 for December ’23 delivery.
Almost immediately after the results were released, Washington state senator Mark Mullet spoke of plans to introduce a bill intending to lower WCAs prices. The bill would adjust the compliance schedule and increase the available APCR allowance bank to lower future auction settlement prices like ones seen in the California-Quebec market hovering around $33.00 to $35.00.
WCA Schedule
APCR Auction #2 Notice |
September 8th, 2023 |
APCR Auction #2 |
November 8th, 2023 |
APCR Auction #2 Results |
November 15th, 2023 |
|
|
Q4 Auction Notice |
October 6th, 2023 |
Q4 Auction |
December 6th, 2023 |
Q4 Auction Results |
December 14th, 2023 |
Offsets Update
- The Department of Ecology has approved the American Carbon Registry (ACR) and Climate Action Reserve (CAR) to list offset projects for the state’s cap-and-invest program.
- There are also offsets in WCI-CITSS system that have been approved by California that will likely be available to comply with the Washington program.
- 190,000 offsets were offered late in August by an ODS developer and traded in the $59-60 range when underlying spot allowances were trading $66.00. This puts offsets between 89%-91% of the value of offsets. California Offsets are currently valued at 80% of the value of allowances but have traded in the range 65% to 98% since program inception in 2013.
WCA Pricing Update
- Allowance pricing as of September 7th, 2023: $52.85 – Vintage 2023, Sept. 2023 Delivery
- Allowance pricing as of September 7th, 2023: $54.15 – Vintage 2023, Dec. 2023 Delivery
- The average daily price in August 2023: $67.94 – Vintage 2023, Dec. 2023 Delivery
Market Update
- Dec. ‘23 allowance prices remained steady in the first two weeks of August, holding at $67.50 before seeing a brief uptick to $68.25. Prices then jumped to $69.50 through the third week, nearly meeting the all-time high of $70.00 seen in April before returning to $67.50 to close out the month.
- In wake of the auction results and statement from Mark Mullet, December 2023 allowances are now trading 27% higher than where they began the year, a significant decrease from July’s YTD percentage change of 59%.
- The vintage 2026 allowance spread with vintage 2023 has tightened from the $5.00 level to the $2.00 level as compliance entities see this as an opportunity to save a few dollars on their 2023 compliance as 70% of their 2023 compliance, due November 1st, 2027, can be met with 2026 Vintage.
- The trade volume in the secondary market is expected to continue to increase each quarter as more allowances are released in the market via the auctions and through free allocations later this year.
- Open interest on futures market increased by 46.5% from August to September which was mainly driven by ICE increasing market share to 40% after starting the Q2 ‘23 at 0%. Nodal has 60% share and many market participants expect ICE to pass Nodal within next few months.
Figure 1. WCA Daily Transactions (Jan. 2023 to Present)
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WCA Pricing (Vintage 2023)
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Prompt Delivery
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Dec. '23 Delivery
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Average Daily Price (YTD):
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$ 61.69
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$ 57.44
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Average Monthly Price (August 2023):
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$ 66.10
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$ 67.97
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2023 Highest Daily Price:
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$ 67.50 (Aug. 16th, 2023)
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$ 70.00 (Apr. 14th, 2023)
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Figure 2. WCA Open Interest (July 2023 to Present)
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