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Why Did Prices Crash at California’s Carbon Auction?

mazzacurati, emily, four twenty sevenCCA V13 contracts closed at $12.40 on ICE on a recent Friday, a one dollar drop from the week before, and brokers reported a boost in activity as buyers sought to take advantage from the lower prices. In my view, the slowing demand for V13 allowances reflects the fact that many participants have already bought what they need for the year.

In contrast, demand for V16 allowances surged, signaling a boost in confidence in the programs’ long term prospects. Secondary market activity and prices for V15 and V16 allowances were also on the rise that week, with V15 closing at $12.05 and V16 at $12.55 on the Friday. (You can read a detailed analysis of the auction results and participants here.)

The discussion is still ongoing regarding bill SB 605. In its July 3rd version, the bill restricted offset projects in the AB 32 cap-and-trade regulation to projects based in California. Such a restriction would cut available offset supply by 70 to 90 percent compared to current projections, worsening the expected shortage of credits available for use in the California carbon market, and escalating credit and allowance prices. These provision will probably be amended to include offset projects located in the US or in WCI partner jurisdictions. Whether international credits, REDD specifically, will make the cut is still uncertain – a change to that effect would wipe out a large potential source of supply for the California market, and would remove a source of much needed support for REDD globally.

That same SB 605 bill also mandates that funds in excess of the $500 million loaned to the General Fund be spent on programs and projects located within and benefiting disadvantaged communities, a popular provision that has drawn support from many social and environmental organization, and makes it likely to bill will be adopted on one form or other.

Investors and stakeholders now routinely ask for climate risks and opportunities disclosure, and the bar is set to be raised as climate adaptation has been identified as a policy priority by President Obama.

Emilie Mazzacurati is managing director of Four Twenty Seven. Four Twenty Seven has partnered with ISOS Group to provide a special session on climate risk disclosure as part of ISOS’s Sustainability Reporting Training course on September 4-5 in Mountain View, CA. Participants will learn about local and global climate impacts and most exposed sectors, tools to identify risks and opportunities across the value chain, and best practices for reporting climate risks. In case you missed it – read our primer on auctions: Selling California Auctions (Carbon Market Tracker, In Focus #20, May 2013), published jointly with Carbon Credit Capital LLC. The ten-page downloadable report provides a thorough description of the auction mechanics, participant dynamics, the role of utilities, and the use of auction revenues – a must-read for market participants!

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