Opinion, Berkeley Blogs

California's second cap-and-trade auction: Signs of a maturing market

By Elizabeth Bailey

The California Air Resources Board (ARB) held its second auction for greenhouse gas allowances this past Tuesday (Feb. 19).  Severin Borenstein blogged about his reactions to the first auction held back in November 2012 here.

As a quick refresher, in the first auction, the market clearing price for a “current” vintage 2013 allowance was 9 cents above the auction reserve price of $10 per ton and all allowances available for sale – roughly 23 million – were sold.  The first auction had its share of excitement and controversy, which you can read about here.

The results of the second auction were released on Friday.

The market clearing price for a “current” vintage 2013 allowance was $13.62, nearly $3 above the auction reserve price of $10.71.  All the “current” vintage allowances available for sale were sold.

To me, the evidence suggests the market is maturing.

It is important to be clear:  On its own, higher spot prices are not a sign of a maturing market.  Similarly, a sold-out and/or over-subscribed auction is not a sign of a maturing market.

On the other hand, pricing evidence which is consistent with resolution of some of the uncertainty surrounding the future of the California cap and trade program is suggestive of a maturing market.

The relationship between the clearing price of a “current” vintage allowance in the November 2012 coupled with the corresponding “future with a floor” product being priced on the Intercontinental Exchange (ICE) suggests that there was a substantial implied belief by the market back in November 2012 that the cap-and-trade program may not persist in the near term.

The current relationship, however, between the auction clearing price for a “current” vintage allowance and the corresponding ICE product suggests a sizable reduction in uncertainty about the likelihood of the program persisting.   The results of these calculations are consistent with a maturing market.

For those who follow this market closely, this insight will not come as a surprise.  For one thing, in late January, a San Francisco Superior Court judge resolved on-going litigation over the use of offsets in the cap-and-trade program in ARB’s favor.

To be sure, there is still uncertainty to be resolved.  For now, however, the evidence suggests that market participants believe the market is maturing.

Cross-posted from Energy Economics Exchange (tag line: Research that Informs Business and Social Policy), a blog of the Energy Institute at Haas.