Decoding Ontario’s Carbon Market A short and long term impact analysis of the first auction April 12, 2017 www.climate-connect.com Photo by Kevin White
Meet your presenters Chandan Kumar Billy Hamshaw Lead Economist Product Manager Climate Connect CaliforniaCarbon.info chandan.kumar@californiacarbon.info billy@californiacarbon.info www.climate-connect.com
Who we are Market: : EUA futures and energy markets EAGLE: machine learning based algorithms for forecasting and trading ONTARIO & QUEBEC EUROPE Market: : Emissions Trading ChinaCarbon.net.cn: carbon CHINA CALIFORNIA analytics portal for the Chinese carbon markets Market: : Emissions Trading INDIA CaliforniaCarbon.info: a news, data , and analytics portal Market: : Solar and power markets for the WCI carbon market EAGLE: machine learning based algorithms for renewable energy generation forecasting & load forecasting IndiaPowerTrading.info: a data and forecasting portal for power markets in India www.climate-connect.com
Forecast Models 2030 WCI Carbon Triptych 2030 WCI Price Allowances Long-term Offset Generation www.climate-connect.com
CCAs Auctions and Trading Auction Statistics Bid-qualification Histories After Auction Review Open Interest Tracker Secondary Market Prices Weekly Commentaries and Reports www.climate-connect.com
Offsets ROC Tracker CCO Tracker OTC Prices Weekly commentaries & Features www.climate-connect.com
News Weekly News Round-up Interviews Guest features a nd more… • Downloadable APIs • Webinars and one-on-one discussions • Events www.climate-connect.com
Agenda • WCI Carbon Market Overview • Ontario Carbon Market – Overview – Ontario Capped Sector Emissions Forecast – Ontario Allowances Supply-Demand Forecast – Ontario Surplus-Shortage of Allowances • WCI Carbon Market through 2030 – WCI Capped Sector Emissions Forecast – WCI Allowance Supply-Demand Forecast – WCI Surplus-Shortage of Allowance • WCI Allowances Price Forecast – Methodology for Price Forecast Of Carbon Allowances – Offsets Usage – WCI Allowances Price Forecast • Scenarios for the year ahead – Undersubscribed Auctions – State of Surplus – Conclusion www.climate-connect.com • Q&A Session
WCI Carbon Market www.climate-connect.com
WCI Carbon Market Western Climate Initiative (WCI) Carbon Market’s Allowance Demand Breakdown • Western Climate Initiative: Collaboration among 26% state and provincial governments to tackle climate 0% 26% 17% change via market-based mechanisms such as emissions trading scheme (ETS) • California and Quebec have actively established emission trading policies. Ontario is third in the 62% WCI to establish an ETS this year, with aim to link 12% 62% 12% to the CA and QC in 2018 83% Total expected covered emissions in 2018: 529 MMtCO 2 e (CA+QC+ON ) www.climate-connect.com California Quebec Ontario
Ontario Cap-and-Trade www.climate-connect.com
Ontario Cap-and-Trade – Bill 172 - the Climate Change Mitigation and Low-Carbon Economy Act. It aims to establish a foundation for Ontario’s cap -and-trade program to achieve its long term GHG emissions reduction target of 15% below the 1990 level by 2020 , 37% below 1990 by 2030 and 80% below 1990 by 2050 . – Cap emissions at 142.33 MMt in 2017 , drops at over 4% per year to 124.67 MMt in 2020. More stringent annual reductions than California – Capped sectors include industrial, electricity imports, natural gas distribution and petroleum product supply sectors – First compliance period will consist of four years from 1 st Jan 2017 to 31 st Dec 2020. After this, Ontario will synchronize with the rolling compliance periods scheduled in the broader WCI program – Emitters offsets usage can meet up to 8% of their compliance obligations – Free allowances to primarily manufacturers for the first four years www.climate-connect.com
Emissions Forecast www.climate-connect.com
Ontario 2030 Capped Sector GHG Emissions Forecast 160 148.2 150 141.4 140.5 GHG Emissions (In million tons) 146.6 140 136.6 140.6 133.4 132.6 130.7 130 126.2 130.2 120.3 120 122 114.5 110 100 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Historical Base Case High Case Low Case • Capped sector emissions is projected to decrease by 14.4% between 2014 and 2030, when it reaches 120.3 MMtCO 2 e. • Low emissions (2030) – 114.5 MMtCO 2 e • High emissions (2030) – 130.7 MMtCO 2 e www.climate-connect.com
Ontario Supply and Demand Forecast www.climate-connect.com
Offset Usage • Covered emitters will likely be able to use credits generated by qualifying offset projects to meet up to 8% of their compliance obligations. • Maximum theoretical cumulative demand for offsets based on full 8% usage: CP1: (2017-2020) - ± 43 million • The extent of 8% usage depends however on the entity size • Most Ontario entities covered under CP1 (2017-2020) are expected to be below 2.5 MMtCO 2 e • Conservative estimated cumulative demand for offsets: CP1: (2017-2020) – ± 10.8 million www.climate-connect.com
Offset Supply • The Climate Action Reserve are in the process of developing protocols • Still many unanswered questions on the regulation • Recognition of ‘Early Action’ credits • Third party registries • Anticipate ON entities net buyers of CA offsets in initial years • Factors affecting demand • Invalidation risk • Foreign exchange rate risk • Desire to reduce emissions at the domestic level • Will ON offsets hold a premium to CA offsets …… .? www.climate-connect.com
Ontario Allowance Supply and Demand Scenarios 160 Allowances (In millions) 136 134 134 133 130 130 128 127 123 140 119 117 112 135 120 118 106 100 92 80 60 40 20 - 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Base case demand Low Demand High Demand Supply; 37% target • The allowances budget is expected to decline in coordination with other WCI partners during 2021- 2030 to reach 92.4 million from 124.7 million in 2020 • The Allowance Price Containment Reserve (APCR) volume will decline gradually from 5% in 2020 to www.climate-connect.com 0% of the allowances budget in 2030.
Expected Ontario Allowance Shortage under Baseline Scenario without Linkage 30 220 198 Annual Allowances Shortage (In Millions) Cumulative Allowances Shortage (In 25 170 20 Millions) 120 15 10 89 70 5 20 20 2 - 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 (5) (1) (30) Annual Shortage Cumulative Shortage • Baseline demand and supply scenarios: Annual shortage of 25 million for the 2030 compliance year. Cumulative shortage of 198 million across 2017-2030. • The cumulative shortage for an Ontario stand alone market would trigger as early as 2018. www.climate-connect.com
WCI Emissions Forecast www.climate-connect.com
Capped Sectors GHG Emissions Forecast 400 600 WCI Emissions (In million tons) 533 524 350 502 477 Emissions (In million tons) 500 340 332 327 300 314 297 400 250 408 200 300 140 135 133 126 120 150 200 67 66 100 65 62 60 100 50 - - 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 California Quebec Ontario WCI Capped Sector Emissions Forecast (In million tons) California Quebec Ontario WCI 2015 340 67 - 408 2018 332 66 135 533 2025 314 62 126 502 www.climate-connect.com 2030 297 60 120 477
WCI Supply and Demand Forecast www.climate-connect.com
Methodology for Demand-Supply Forecast of Carbon Allowances Supply: Allowance budget adjusted with Allowance Price Containment Reserve (APCR) volume Multivariate Time- Series Econometric Model Demand: Capped sector emissions forecast adjusted with various demand- mitigating factors such as offsets and leakages. www.climate-connect.com
Expected Offsets Usage 16 19.0 14.5 14.1 13.9 13.4 18.5 18.5 12.7 14 18.1 18.0 18.2 WCI Offsets Usage (In millions) 12 17.5 In Millions .17.2 10 17.0 8 16.5 16.0 15.9 6 15.5 3.09 3.2 3.0 4 2.7 2.7 15.0 1.6 1 6 1.6 1.3 1 .5 2 2 14.5 - 14.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 www.climate-connect.com California Ontario Quebec WCI
Offsets Demand Scenarios • CA-QC Maximum theoretical demand for offsets based on full 8% usage: CP2: (2015-2017) - ± 96 million • CA-QC Conservative estimated demand for offsets based on entity size: CP2: (2015-2017) - ± 47.1 million • CP2 first annual surrender – 7.9% • 8 million offsets retired • In order to meet maximum demand for CP2 , supply must reach 88 million by compliance obligations in Nov 2018 • Additional demand for CA offsets expected from ON buyers • Long term forecast (2015-2030): Max theoretical demand – ± 615 million www.climate-connect.com Conservative estimated demand – ± 287 million
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