The Western Climate Initiative (WCI) released on their website this week an economic analysis assessing a linked program between California and Quebec.
The analysis projected prices of $19/metric tonne (mt) in 2013 in a joint Quebec/California program scenario. The price assumes that three-fourths of allowable offsets are available for the market. Under this assumption, the study states that a Quebec-only program will see prices of $37/mt and that a California-only program would yield 2013 prices of $17/mt. The study suggests that Quebec’s greenhouse gas reductions are much more expensive than California’s partly due to the large amount of hydroelectric power in the province.
In the worst offsets scenario (in which only half the allowable limit is available), a joint California/Quebec program would yield a price of $34/mt, according to the study. Alternatively, if California and Quebec were unlinked a California 2013 allowance price would be $34/mt while a Quebec-only program would be $43/mt.
The modeling was conducted by the WCI’s economic modeling team last month and is dated May 7th. However, the document was released only recently.
On June 28th the California Air Resources Board is expected to adopt a Linking Regulation authorizing California to link with Quebec for the first auction scheduled for November 14, 2012. This regulatory activity comes amid some skepticism in Sacramento where there is legislative effort to prohibit California from linking with Quebec.
While the WCI report focused on the cost-containment benefits of offsets, the market is beginning to get a better understanding of future price fundamentals. Upside price risk was also demonstrated last week when the California-located San Onofre Nuclear Power Station (SONGS) announced its two units would be offline for the balance of the summer. Events surrounding the units coming back have impacted power and carbon prices significantly. For instance, California carbon allowances (CCAs) for December 2013 delivery traded from the mid-$15.00 range to $16.25 over the course of one day last week. Some market participants attributed the price move to the SONGS announcement.
If the units remain offline into next year it could lead to increased use of fossil-based generation to meet power demand. 2,350 MW from SONGS would need to be replaced thereby creating more emissions and demand for CCAs. Market participants are looking towards September and October for clues as the fate of the units.
If you have any questions on the current market conditions, please contact our US Carbon team at: +1 415.963.9137 or +1 914.323.0265.