(CaliforniaCarbon.info, Jan 16, 2017) Last week’s dynamic of sharply rising prices accompanied by moderate volume carried on over the last five days, the front price rose a full $0.17 to conclude the week at $13.30. Whilst a rise to the new price floor of $13.57 was expected over the course of 2017, few would have predicted such rapid gains by the market. And on Friday’s end the annual benchmark closed at $13.60, the first time any price point in 2017 has finished above the price floor. It seems a combination of favourable regulatory momentum and previous experience creating future expectation has accelerated this process.

The State’s legislators signalled their climate intentions on Thursday last week. In time for the deadline on January 20^th, AB 151 was introduced by Assembly members Burke, Cooper, Low and Rubio, it is a placeholder bill that intends to specifically legislate for Cap-and-Trade post-2020 through to 2030. Depending on its passage and it’s passing majority this bill could have a variety of impacts. Firstly, and on a very basic level, in the highly unlikely situation of ARB choosing one of its ‘alternative paths’ in Direct Regulation or a Carbon Tax, the bill’s passage would probably overturn that decision by the regulator. It’s very existence in draft stage has confirmed to ARB that their preference for a market-based program is shared by some of those in the Legislature.

However, the above impact is certainly not the primary ambition of the bill’s authors, that would be ensuring a passage by a supermajority so as to protect the program from the legal danger upcoming on January 24^th in the CCC vs ARB case. The 2/3rds vote allows the program to act as a tax. and thus the major attack on the program would be negated; even if the court did find auctions to be tax, it would be a lawful one.

Back to the week’s trading activity, the aggregate traded volume came in at 5,501,000 – a fraction shy of last week’s total. The vast majority of this at 91% was for the current V2017, the remainder was shared by V2016 and V2015. By delivery date, the volume was split evenly between the front and the benchmark both with 49%, the advance month of February saw a single trade for the rest of the volume.

The market’s open interest grew significantly this week. The 3,937,000 fresh contracts emerging gave a creation ratio of 71%. This ‘fertility’ of the market ought to be expected in the first few weeks of the year as contracts on the new current vintage build quickly. This growth is likely to continue through to the conclusion of the first auction of the year on February 22^nd, where auction allowances will be digested by the secondary market, before the market is likely to quieten down through the middle of the year.

Harry Horner – (harry@californiacarbon.info)