The Q2 2019 WCI auction: Higher prices, similar market dynamics

Results from the May 2019 WCI auction are now available. Both current and advance auctions sold out in full, at prices slightly higher than in recent auctions. The current auction settled at its highest price ever, $17.45, noticeably higher than the auction floor price of $15.62. While prices have climbed, they remain within the historical range relative to the floor price.

Revenue implications

While the final tally won’t be available until early June, sales of California-owned allowances yielded roughly an additional $743 million in revenue for the Greenhouse Gas Reduction Fund (GGRF). This is somewhat lower than the revenue from recent auctions, because all of the previously unsold California-owned allowances from 2016-17 have now either been reintroduced and sold at auction or removed from the normal auction supply. As long as auctions continue selling out, Quebec will continue reintroducing small amounts of previously unsold allowances through the November 2020 auction.

Revenue from the May auction brings total GGRF revenue for fiscal year (FY) 2018-19 to around $3.2 billion. That happens to be very close to what we estimated back in January, although actual results have differed somewhat from the assumptions that got us there.

In January, we compared GGRF revenue projections from Governor Gavin Newsom’s first budget proposal with our own estimates of GGRF proceeds using Near Zero’s model of the Cap and Trade Program. We found that the Governor’s January revenue projections for fiscal year (FY) 2018-19 and FY 2019-20 were lower than our estimates by 15-20%, assuming continued full auction sales at the auction floor price.

In reality, the February 2019 current auction did sell out slightly above the floor price, but the advance auction sold only two-thirds of the California-owned allowances on offer, leaving some potential revenue on the table. The higher prices and full sales in the May 2019 auction, however, more than made up for this shortfall.

Prior to the May auction, the Governor also released the May Revision to the budget proposal. Any revisions to the GGRF revenue projections are not publicly available, but the May Revision did propose an additional $251.5 million in GGRF expenditures, on top of the $1 billion Cap and Trade Expenditure Plan in the January budget proposal.

Looking forward, we continue to estimate that FY 2019-20 proceeds will be around $2.5 billion if auctions sell out at the floor price, and minimum auction proceeds would remain relatively flat and above $2 billion per year into the mid-2020s. Below, we show an update to our January projection to incorporate the auction results from February and May. If future auctions sell out at prices noticeably above the floor, as in the May auction, then revenues would be higher than shown here.

New market entrants?

One other trend bears watching. The May 2019 auction marked the second lowest percentage of allowances purchased by compliance entities (as opposed to other market participants), and the percentage was noticeably lower than in other recent auctions. While this could signal the entry of new market participants purchasing excess allowance supply, the percentage purchased by compliance entities is still quite high (86.1%). It is also not so different from historical precedent as to suggest any major changes in market dynamics at this point. We’ll be tracking this and other market trends going forward.