NA Markets: WCI set to show 30 mln tonne surplus for first 2-yr compliance period

Published 17:26 on October 30, 2015  /  Last updated at 21:54 on December 16, 2015  /  Americas, Canada, US

The WCI is likely to have a surplus of 30-33 million tonnes for its first two-year compliance period once installations have surrendered permits and data for 2014 is published next week, according to analysts.

(Corrects Quebec’s cap for 2013 and 2014 to 23.2 million for both years, from 18 million in 2013 and 19 million in 2014.)

The WCI is likely to have a surplus of 30-33 million tonnes for its first two-year compliance period once installations have surrendered permits and data for 2014 is published next week, according to analysts.

The 2013-2014 compliance period for California and Quebec’s linked markets ends on Nov. 1, obliging industrial plants and power stations to surrender allowances covering all their 2014 emissions and 70% of their 2013 emissions. They were required to hand in permits covering the first 30% a year ago.

“We forecast the market will be long by 14 million tons in 2014, and cumulatively 33 million tons long for the first compliance period,” said Thomson Reuters Point Carbon analyst Olga Chistyakova.

California capped emissions at 160 million tonnes in 2013 and 157 million in 2014, while Quebec’s limit was set at 23.2 million in both years.

Point Carbon estimates California’s surplus over the two years will be about 25 million tonnes, with Quebec accounting for the remainder.

Climate Connect analyst Steven Neoh estimated the allowance surplus would be around 30 million tonnes, plus the number of offset used.

“The 2014 surplus will be slightly smaller than in 2013, mainly because the cap is lower,” Neoh added.

Installations may only use permits issued in 2013 and 2014 for compliance in the first phase. Prices for those vintages closed Thursday at $12.89 and $12.87 respectively amid virtually no trade on ICE.

Dec-2015 CCAs barely moved throughout the week, with total volume of less than 1 million tonnes, compared with more than 4.5 million last week.

As of Oct. 5, covered installations had already placed more than 167 million allowances for 2013 and 2014 in their compliance accounts.

“The market doesn’t expect any surprises when the data comes out,” one New York-based broker said.

“We’ve seen a gradual increase in prices, which suggests things are going as planned.”


Offset use is likely to increase significantly compared to last year, the analysts said.

To date, California’s Air Resources Board (ARB), the market’s regulator, has issued around 30 million offsets, with the state’s 8% annual offset usage limit translating to around 25 million over the 2013-2014 period.

“This year I expect there are going to be more tonnes (surrendered) because more have been issued,” Chistyakova said. “I expect most of those (issued) credits, minus the few million surrendered last year, will be surrendered next week for compliance.”

However, Neoh said he believes that “a lot” of offsets have been bought by wholesalers, who may wait for prices to rise rather than let those units be surrendered.

So-called “golden” offsets, which have completed their invalidation period, have traded within 85 cents of Dec-15 CCAs in the over-the-counter market, reflecting the overall offset shortage, he added.

“It remains to be seen if the discussions at ARB about bringing in new supply for 2018 might tempt aggregators to sell,” Neoh said, referring to a proposal by the regulator to allow the use of international sector-based offsets later this decade.

“I don’t think you’ll see 100% of (issued) offsets used (next week), but equally you won’t see 15 million offsets carried over.”

The WCI cap will approximately double in size from this year as the transportation and retail natural gas sectors are brought under the programme’s scope.

All covered installations will face their first 2015 compliance deadline in November 2016, when they’ll need to surrender against 30% of this year’s emissions.

The inclusion of the sectors boosted trading activity, particularly in Q1, as the new participants entered the scheme with no allowances and sought to quickly build up their holdings, Chistyakova said.

“There’s definitely more volume on ICE, more block trades, so it’s probably a combination of the large industrials and some speculative trades by intermediaries,” she added.

“The volume is greater in the secondary market and the auctions are all clearing above the price floor, even though the market is long.”

By Alessandro Vitelli –