California Sells 19.5 Million Carbon Allowances at $11.48 Each

Feb 24, 2014 4:40 pm ET

Feb. 24 (Bloomberg) -- California, the second-most polluting state in the U.S., sold 19.5 million carbon allowances at auction for $11.48 each, in line with analysts’ expectations.

Units of BP Plc, Chevron Corp. and Calpine Corp. were among the companies that qualified to buy permits in the Feb. 19 auction, a report posted on the state Air Resources Board’s website today showed. The agency doesn’t disclose the names of winning bidders. The state received 1.27 offers for every permit put up for sale.

The allowances, each permitting the release of a metric ton of carbon, were offered as a record dry spell shrinks California’s hydropower generation, increasing demand for more emissions-intensive, natural gas-fired power plants. Gas for delivery at trading hubs across the state surged to records earlier this month as frigid weather swept across the region, further adding to demand for the heating fuel.

The initial reaction to the auction results was “muted,” with minimal trading activity being reported, according to Lenny Hochschild, head of global carbon markets for White Plains, New York-based Evolution Markets. “There doesn’t appear to be a lot of interest or activity at the moment,” Hochschild, who is based in San Francisco, said in a telephone interview.

Participants in the auction were fully pricing in “the most recent greenhouse-gas data showing the market is long at least through the first compliance period,” running through 2014, Emilie Mazzacurati, managing director of the carbon market consulting firm Four Twenty Seven in Berkeley, California, said by e-mail.

Allowances Gain

Futures based on permits that can be used to cover emissions as early as this year settled on Feb. 21 at $12.15 a ton, data compiled by CME Group Inc. show. The allowances, for delivery in December, have climbed 1.7 percent this year.

California, which released more emissions than every U.S. state except Texas in 2011, put up 19.5 million permits at the Feb. 19 auction that can be used as early as this year. The state also auctioned 9.26 million permits that can be used for compliance beginning in 2017, known as “advance” allowances. Those went for $11.38 each.

Allowances were expected to sell near the minimum price allowed by the state, or the “floor” price, of $11.34, William Nelson, a Bloomberg New Energy Finance analyst in New York, said by e-mail.

More Confidence

Mazzacurati predicted that both the 2014 and advance allowances would sell out at the auction, with 2014 permits going for $12.10 and the future 2017 ones for $12.80.

“The market has gained confidence in the long-term viability of the program,” she said.

ICIS, a London-based petrochemical market data company, lowered its forecasts for the auction’s settlement prices after California Senate President Pro Tem Darrell Steinberg of Sacramento proposed legislation Feb. 20 that would tax transportation fuel suppliers for carbon emissions instead of regulating them under the cap-and-trade program as planned next year.

“Uncertainty regarding the transport fuel sector in the second compliance period could lower demand and push the price lower than previously anticipated,” Jon Ornelas, director of U.S. emissions markets at ICIS, said by e-mail today. “Current auction prices could clear below $12 and the future vintage much closer to the floor.”

Ornelas had initially said 2014 allowances would sell for around $12.10 with advance permits going for $11.75.

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.

--Editors: Richard Stubbe, Charlotte Porter