Unofficial link between US carbon markets emerges from trader losses

Published 22:59 on May 6, 2016  /  Last updated at 02:01 on May 7, 2016  /  Americas, Bavardage, Canada, US  /  No Comments

Operators of the two US carbon markets may be starting to consider linking options for their cap-and-trade schemes, but a somewhat loose and informal connection between the two programmes has emerged out of a few traders’ profit and loss books.

Operators of the two US carbon markets may be starting to consider linking options for their cap-and-trade schemes, but a somewhat loose and informal connection between the two programmes has emerged out of a few traders’ profit and loss books.

Allowance prices in the nine-state RGGI programme plummeted by more than 40% to around $4.50 in Q1 due to bearish sentiment following the US Supreme Court’s decision to stay the Clean Power Plan and the liquidation of large speculative long positions.

But while that market is completely separate to California’s carbon market, the drop prompted some participants to sell California Carbon Allowances in order to offset their losses, according to a number of people attending the Navigating the American Carbon World conference in San Diego this week.

Benchmark CCA prices fell from around $13.25 to $12.70 in February, near that market’s auction reserve price of $12.73, on what observers also attributed to speculative profit taking in the days after the RGGI drop.

“It was notable because CCA prices don’t ever move that much,” one participant said on the sidelines of this week’s conference.

“Participants are active across both markets, so if they’re taking losses on RGGI, that affects their California positions,” added Judith Schroeter, lead analyst on US carbon markets for ICIS-Tschach Solutions.

Sources said the impact of the RGGI price decline also rippled into the US renewable energy certificate (REC) market.

Energy markets around the world experienced sharp declines in the first few months of the year, but observers identified the RGGI price drop and the Supreme Court stay as the main reasons for California’s decrease.

RGGI last month opened a consultation on what other US states need to do in order to trade with it, while New York State Governor Andrew Cuomo late last year ordered his state’s agencies to start looking into linking options for the market.

Meanwhile, Edie Chang, deputy executive officer of California’s market regulator ARB, this week said that while the state is open to expanding its programme, the Supreme Court’s stay of the CPP may have slowed that momentum.

She added that California may look into other “looser” linking options with states, in contrast to “tight” linkages like the one expected between Ontario and Quebec’s markets, which will, for example, share auctions and offset protocols.

This, she said, could lead to clusters of cap-and-trade schemes or ‘carbon clubs’ – a decentralised, cooperative approach to carbon markets.

FALLEN COMRADES

Attendees at this week’s conference were also scoping the landscape for traders and companies rumoured to have pulled back or exited the market due to their being burned by the steep price falls in Q1.

A number of sources said at least two or three companies had scaled back or shut down their carbon trading operations following deep losses, including a major investment bank and the trading arm of a US-based offset project developer.

By Mike Szabo – mike@carbon-pulse.com