Washington's Carbon Market Concludes 2023
December Auction price movements and underlying factors, Summary of all 2023 WCA Auctions.
Washington's carbon market, known for its dynamic nature since inception, has recently experienced notable shifts. The fourth and final auction of 2023 of the Washington Carbon Allowance (WCA) concluded with a settlement price of $51.89 per metric ton of CO2, a stark contrast to the $63.03 from the third auction. This decrease, though marginal from the Allowance Price Containment Reserve (APCR) trigger price, signals significant market adjustments and potential future trends.
Auction #4 Results
The auction's results were twofold - the current auction clearing at $51.89 and the advanced auction at $45. Both numbers are critical, particularly when juxtaposed with past auction results. The advanced auction's clearance at $45, notably higher than the previous $31.12, suggests the market's anticipation of a possible linkage with California as early as 2026.
In contrast, the dip in the current auction's clearing price to $51.89 marks a 17.73% decline from the third auction. This decline can be attributed to several factors, primarily the increased supply from the APCR and emerging legislative risks.
Investor Dynamics and Bid Ratios
The auction recorded participation from 55 qualified bidders, with 11 financial entities, including 3 funds and 8 other financial entities, indicating a steady yet cautious financial involvement. Notably, investor-won allowances decreased to 13%, down from 14.54% in the previous auction. This shift highlights a changing investor sentiment, possibly influenced by market uncertainties and policy risks.
The bid-to-cover ratio, a critical indicator of market demand, stood at 1.48 for the current auction and 1.66 for the advanced auction, suggesting a relatively lower demand compared to previous auctions. Such a shift in bid ratios can be a harbinger of changing market perceptions and future trading behaviors.
Legislative Risks and Market Implications
The Washington carbon market is currently grappling with potential legislative alterations. The ballot initiative 2117 and multiple bills in the legislature aim to reduce the stringency of the program. While strong support from the Governor suggests minimal likelihood of these bills passing, the market is nonetheless factoring in these risks, as evidenced by the auction results.
The Role of APCR and Its Impact
The availability of 7 million APCR at Tier-1 price in 2024 has undoubtedly contributed to the current auction's price decline. The auction's clearing price being just a cent below the APCR trigger price means that there won't be an additional APCR auction in February 2024. This scenario underlines the critical role of APCR in shaping market prices and supply dynamics.
The current auction prices raise concerns about Washington's ability to achieve its ambitious 45% reduction below 1990 levels. However, a potential linkage with California's carbon market is increasingly viewed as a plausible solution to meet these targets. Such a linkage could harmonize the two markets, potentially stabilizing prices and ensuring more effective emissions reductions.
Washington’s Auctions for 2023
#1
The inaugural auction set a robust foundation for the program. All allowances, totaling 6,185,222, offered by the Department of Ecology (Ecology) found buyers, closing at a settlement price of $48.50 per allowance. This outcome notably exceeded the floor price of $22.50, underscoring strong market interest. The absence of allowances from the Washington Entity Consignment highlighted the initial reliance on Ecology's offerings.
#2
May's auction observed an uptick in both the price and volume of allowances. Ecology successfully sold all its 8,585,000 allowances. Current vintage allowances settled at $56.01, significantly higher than the March auction, reflecting increasing market confidence. Future vintage allowances, a new introduction, settled at $31.12. Remarkably, 89.88% of these allowances were snapped up by compliance entities, indicating a growing compliance-driven demand in the market.
#3
September’s auction continued the trend of selling all available allowances, totaling 8,585,000. The settlement price for current vintage allowances reached a new high at $63.03. Notably, this auction did not offer future vintage allowances. The auction floor price remained steady at $22.20. The entry of 2,927,349 allowances through entity consignment marked an increased diversity in the supply pool. Compliance entities continued to be the major buyers, accounting for 85.46% of purchases, signaling ongoing compliance-driven market dynamics.
#4
The final auction of 2023 saw a slight decrease in the settlement price for current vintage allowances to $51.89, and an introduction of future vintage allowances at a settlement price of $45.00. The total offering of 7,142,146 allowances, including a more substantial contribution from entity consignment, highlighted the evolving structure of the market. The proportion of compliance entity purchases remained high at 87%, showcasing continued regulatory adherence.
