This article was last edited on 13 December 2017. All major edits are italicized. 

CaliforniaCarbon.info, December 11, 2017:California Carbon Allowance (CCA) prices plunged 29-31 cent drop across the curve on Thursday, a day after Ontario announced an under-subscription of the V17 Ontario Carbon Allowances (OCAs) auction which was held on 29^th Nov. However, prices rebounded by 10 cents the very next day on the back of a significant 1,067,000 tons in traded volume which might indicate that Thursday’s price drop was not commensurate with wider market sentiments.

The current front and benchmark (V17 Dec17) closed the week at USD 14.95 resulting in a 24-cent drop in price since last week.

Ontario Auctions and Holding Limits in play?

The drastic price drop which coincided with the Ontario auctions this week could indicate that entities are being cautious due to unexpected under-subscriptions at the Ontario auctions. Some market sources are pointing to the amalgamation of Enbridge Gas Distribution Inc. and Union Gas Limited which could halve the holding limit of the combined entity next year were it not for the linkage to the WCI as explained below. 

“In 2017, Enbridge Gas Distribution Inc. and Union Gas Limited shall be treated, for the purposes of this section [Holding Limit], as if each registered participant were a separate registered participant that is not related to the other registered participant, within the meaning of subsection 2 (2). O. Reg. 56/17, s. 1.”

The holding limit is the maximum number of allowances an entity, or a group of affiliated entities, may hold at any point in time. This is calculated as:

Holding Limit (L) = 2,500,000 + 0.025 × (C − 25,000,000)

C = the number of emission allowances created for the year, both in Ontario and in designated jurisdictions (California and Quebec).

For 2017, the maximum allowances of vintage that one covered can hold in Ontario is 5,433,300 tons considering ‘C’ for Ontario stand-alone. While considering the budget for the entire WCI, holding limits in 2017 would be 16,220,300 tons and 2018 would be 15,717,500 tons.

CaliforniaCarbon.info forecasts Ontario emissions in 2017 to be 136,174,290 tons and 2018 to be 135,307,739 tons. Furthermore, we expect that Ontario singularly will be short of 1.8 million tons in 2018 and the whole WCI market would be short by 624 million tons in 2030 (which would be bought at the price ceiling ultimately). Considering the scale of shortage in the long run with the volume of allowances unsold in the last OCA auction (4.398 million which would be offered again in August 2018 at earliest), the magnitude of the price fall last week again seems disproportionate and Friday’s rebound could carry further this week.

Liquidity and Spreads over the last week

The total traded volumes saw a dramatic increase of over 50% from the previous week as 11,295,000 tons were traded. V2017 was the major contributor with 7,088,000 tons exchanged which accounted for 62.75% of total traded volume.  The second highest contributor this week is V2018 with 3,951,000 tons traded making up 34.98% of total weekly volume. Contributions from V2015 made up 0.41%, V2016 contributed 0.44%, V2019 made up 0.66% and lastly V2020 contributed 0.75% of total weekly volume.

Delivery-wise, majority of the trading was spread out between three deliveries – Dec17 (6,778,000 tons), Dec18 (2,517,000 tons) and Sep18 (2,000,000 tons). These accounted for 60.01%, 22.28% and 17.71% of the total.

Around 2 million were traded as spreads between Dec17 and Sep18 at an implied funding rate of 2.15% (annualized).

 Open Interest changes

An additional 2,791,000 open interest contracts were opened last week. 161 contracts closed under Dec17 but 2,000,000 contracts opened under Sep18 is a major contributor to the weekly OI gain. Followed by Sep18, Dec18 had the largest share of OI gain with 952,000 new contracts. Focus is shifting from Dec17 to Sep18 because entities have starting rolling trades in anticipation of joint auction in August and 100% compliance surrender in November commemorating the end of CP2.

OCA reaction

Beginning of the week OCA dropped a cent followed by an 11 cent gain mid-week, right before Ontario auction results were released. Like CCA prices, OCA prices went down 27 cents following the release of the Ontario auction results but not before rebounding 16 cents by the end of the week. As of Friday (12/8) the OCA front and the benchmark prices now stand at CAD 19.24.

CaliforniaCarbon.info will publish a further update on the impact of holding limits and attempt to gain the perspective of Union Gas and Enbridge regarding the impact of their merger on their holding limits.

Abhilasha Fullonton (abhilasha.fullonton@californiacarbon.info)

Rahul Rana (rahul@californiacarbon.info)

Chandan Kumar (chandan@californiacarbon.info)