CaliforniaCarbon.info, January 15, 2018: California carbon allowances (CCAs) saw consistent drop in prices up until the end of the week. The week started off with a 1-cent decrease followed by a 7-cent decrease the next day. On Friday (01/12), the prices bounced back by with a 2-cent increase. Inter-day price volatility was apparent throughout the week with prices ranging from 5-cents to 8-cents. As of Friday, the current front (V18 Jan 18) stands at USD 14.86 and benchmark (V18 Dec 18) is USD 15.27. Since last Friday (01/05) both CCA front and benchmark saw a 17-cent drop.

Market activity picked up the pace last week with increasing liquidity for specific deliveries: Jan 18, Mar 18 and Dec 18. Volumes traded last week totaled to 8,375,000 tons. Entities are rolling Mar 18, a key delivery as it immediately follows the joint auction in February.

One reason for the price drop could be the additional 14,894,520 allowances from previously under-subscribed auctions that could potentially be offered in the first Joint Auction of 2018 (February), thus increasing the market supply this year. We have already seen that the covered entities prefer to surrender allowances earlier than the deadline in order to make full use of their limited exemptions and holding limits. Furthermore, 2018 is the start of a new compliance period in the WCI, which means that entities will have time to react to any perceived shortfall in their 2018 obligations, thus removing the urgency of procuring compliance instruments for the year. If all the remaining 4 auctions are fully subscribed market will have over 60 million additional allowances carried forward in 2019.

Volumes traded concentrated within V2017 and V2018 but minor trades also took place in V2016 and V2019. V2018 saw the most trades with 5,595,000 tons which makes up 66.81% of the total and 2,230,000 tons were traded in V2017 which is 26.63% of the total. V2016 and V2019 saw 450,000 (5.37%) and 100,000 (1.19%) respectively.

Volumes were spread out between five deliveries– Jan18 (5,265,000 tons), Mar18 (1,365,000 tons), Dec18 (1,045,000 tons), Jun18 (600,000 tons) and Dec19 (100,000 tons). Jan18 delivery dominated the trades in the market this week as These accounted for 62.87%, 16.30%, 12.48%, 7.16% and 1.19% respectively.

CCA prices vs. price floor
As expected, the carbon market is trading higher compared to same time last year. A year ago the current front V2017 Jan17 was trading 40 cents (on avg.) below 2017’s annual auction reserve price of USD 13.47. However, this year CCAs have has a stronger start despite losing value over the week standing a full 50 cents above current reserve price. Similarly, last year the benchmark (V2017 Dec17) was trading on an average a dollar below 2018 auction reserve price whereas this time, benchmark (V2018 Dec18), is trading 15-cents below 2019’s expected price floor of USD 15.54.

Open Interest changes
A total of 3,490,000 OI contracts have been added to the market. 2,390,000 contracts opened up for Jan18 followed by 1,030,000 for Mar18. Jun18, Dec18 and Dec 19 saw 200,000, 220,000 and 100,000 respectively.

OCA reaction
OCA prices were volatile this past week. OCA prices bumped 2-cents at the beginning of the week and continued a consistent drop until the week rounded up. As of Friday (01/18) the OCA front stands at CAD 18.57 and the benchmark stands at CAD 19.08. OI remained consistent throughout the week with 3,000,000 for Feb18 while no volumes have been traded recently.

Abhilasha Fullonton (abhilasha.fullonton@californiacarbon.info)