A short and long term impact analysis of the first auction April - - PowerPoint PPT Presentation

www.climate-connect.com

Decoding Ontario’s Carbon Market

A short and long term impact analysis of the first auction April 12, 2017

Photo by Kevin White

www.climate-connect.com

Meet your presenters Chandan Kumar

Lead Economist Climate Connect

chandan.kumar@californiacarbon.info

Billy Hamshaw

Product Manager CaliforniaCarbon.info

billy@californiacarbon.info

www.climate-connect.com

Who we are

CALIFORNIA ONTARIO & QUEBEC Market: : Emissions Trading CaliforniaCarbon.info: a news, data , and analytics portal for the WCI carbon market EUROPE Market: : EUA futures and energy markets EAGLE: machine learning based algorithms for forecasting and trading INDIA Market: : Solar and power markets EAGLE: machine learning based algorithms for renewable energy generation forecasting & load forecasting IndiaPowerTrading.info: a data and forecasting portal for power markets in India CHINA ChinaCarbon.net.cn: carbon analytics portal for the Chinese carbon markets Market: : Emissions Trading

www.climate-connect.com

Forecast Models

2030 WCI Price Allowances Long-term Offset Generation 2030 WCI Carbon Triptych

www.climate-connect.com

CCAs Auctions and Trading

Auction Statistics Secondary Market Prices Weekly Commentaries and Reports Bid-qualification Histories After Auction Review Open Interest Tracker

www.climate-connect.com

Offsets

CCO Tracker OTC Prices ROC Tracker Weekly commentaries & Features

www.climate-connect.com

News

Weekly News Round-up Interviews Guest features and 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

• Q&A Session

www.climate-connect.com

WCI Carbon Market

www.climate-connect.com

WCI Carbon Market

83% 17% 0% 62% 12% 26% 62% 12% 26%

Western Climate Initiative (WCI) Carbon Market’s Allowance Demand Breakdown

California Quebec Ontario

• Western Climate Initiative: Collaboration among

state and provincial governments to tackle climate 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 WCI to establish an ETS this year, with aim to link to the CA and QC in 2018 Total expected covered emissions in 2018: 529 MMtCO2e (CA+QC+ON)

www.climate-connect.com

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 1st Jan 2017 to 31st 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

148.2 146.6 141.4 140.6 140.5 132.6 126.2 120.3 136.6 133.4 130.7 130.2 122 114.5 100 110 120 130 140 150 160 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GHG Emissions (In million tons) 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

MMtCO2e.

• Low emissions (2030) – 114.5 MMtCO2e
• High emissions (2030) – 130.7 MMtCO2e

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

MMtCO2e

• 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

134 130 123 117 133 128 119 112 136 134 130 127 135 118 106 92

• 20

40 60 80 100 120 140 160 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Allowances (In millions) 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

0% of the allowances budget in 2030.

www.climate-connect.com

Expected Ontario Allowance Shortage under Baseline Scenario without Linkage

(1) 2 20 89 198

(30) 20 70 120 170 220 (5)

• 5

10 15 20 25 30 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Cumulative Allowances Shortage (In Millions) Annual Allowances Shortage (In Millions) 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

340 332 327 314 297 67 66 65 62 60 140 135 133 126 120 408 533 524 502 477

• 100

200 300 400 500 600

• 50

100 150 200 250 300 350 400 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

WCI Emissions (In million tons) Emissions (In million tons)

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 2030 297 60 120 477

www.climate-connect.com

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 Demand: Capped sector emissions forecast adjusted with various demand- mitigating factors such as offsets and leakages.

Multivariate Time- Series Econometric Model

www.climate-connect.com

Expected Offsets Usage

14.5

14.1 13.9 13.4 12.7 2.7 2.7 3.2

3.09

3.0 1.3 1.6

1 6 1.6 2

1.5

15.9 18.5 18.2 18.1 .17.2

14.0 14.5 15.0 15.5 16.0 16.5 17.0 17.5 18.0 18.5 19.0

• 2

4 6 8 10 12 14 16

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

WCI Offsets Usage (In millions) In Millions

California Ontario Quebec WCI

www.climate-connect.com

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
• bligations in Nov 2018
• Additional demand for CA offsets expected from ON buyers
• Long term forecast (2015-2030):

Max theoretical demand – ± 615 million Conservative estimated demand – ± 287 million

www.climate-connect.com

Compliance- eligible 29,103,301 Buffered 6,413,106 Retired 20,862,639 Invalidated 88,955

Offsets Supply

• Offsets currently eligible for compliance

29.1 million

• Backlog of ROCs awaiting ARB approval

27.5 million

• High volume of forestry projects in the

pipeline

• Supply expected to meet demand in CP2
• Long-term offset supply will be short
• Additional protocols can be added

www.climate-connect.com

WCI Allowance Supply and Demand Scenarios

505 483 459 500 474 447 513 499 482

184 518 480 415 336

• 100

200 300 400 500 600 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Allowances (In Millions)

Base case demand Low Demand High Demand Supply(CA-40%, QC-37.5%, OA-37%

• The cumulative supply declines from 480 M to 336 M between 2018 to 2030
• Linkage with Ontario adds nearly 103 M allowances to the supply side in 2018; 127-132M to the demand side
• Annual shortage is triggered in 2019 in the base case scenario; 2018 in the high emissions scenario
• Cumulative shortage is triggered in 2024 in the base case scenario; 2023 in the high emissions scenario

www.climate-connect.com

WCI Allowance Surplus-Shortage (Base case)

(37) 19 595

(300) (200) (100)

• 100

200 300 400 500 600 700 (60) (40) (20)

• 20

40 60 80 100 120 140 Cumulative Allowances Shortage (In millions) Annual Allowances Shortage (In millions)

Annual Shortage Cumulative Shortage

• The cumulative shortage is realized in 2024
• Market is short in 2030 by 400 M to 700 M (under different emissions scenarios)
• Cumulative Shortage increases at a decreasing rate

www.climate-connect.com

WCI Carbon Price Forecast

www.climate-connect.com

WCI: Demand-Supply Price Forecast for Carbon Allowances

Historical annual average WCI carbon price Cumulative surplus/ shortage Spread = Auction Settlement Price - Auction Reserve Price Expected Annual Surplus/ Shortage Expected Annual Average Spread Average WCI Carbon Price

www.climate-connect.com

WCI Carbon Allowances Prices Scenarios

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Average Allowance Price (US$) Price Floor Base Case Emissions Low Emissions High Emissions

www.climate-connect.com

WCI Auctions

www.climate-connect.com

Auctions- Mechanics for Unsold Allowances

• Priority of sale starts with closed accounts, allowances in excess of holding limit, and

revoked/suspended accounts. Following the clearance of these allowances, the consigned allowances are prioritized, and finally state-owned allowances are sold.

• Consigned Allowances: Unsold allowances will be held in the Auction Holding Account

and offered in subsequent auctions. Allowances remaining in the LUHA at the end of the year will be offered in the first of auction of the new year.

• State Owned Allowances: California state-owned allowances that remain unsold from an

undersubscribed Current Auction are returned to auction after two consecutive Current Auctions have resulted in a settlement price above the Auction Reserve Price.

• Maximum number of unsold allowances that can be returned is 25 percent of the

allowances originally offered at that auction.

www.climate-connect.com

Auctions- Historical

JA 2 JA 3 JA 4 JA 5 JA 6 JA 7 JA8 JA9 JA10

Qualified Ratio 1.14 1.16 1.28 1.14 0.95 0.11 0.37 0.88 0.18 Volume Cleared (Millions) 73.6 76.9 73.4 75.1 66.4 7.3 30.0 77.0 11.7 Clearing Price (US$) 12.21 12.29 12.52 12.73 12.73 12.73 12.73 12.73 13.57 Auction Reserve Price (US$) 12.10 12.10 12.10 12.10 12.73 12.73 12.73 12.73 13.57

www.climate-connect.com

Scenarios for the year ahead

www.climate-connect.com

Ontario: State of Surplus around Undersubscribed Auction

(1.50) (1.00) (0.50)

• 0.50

1.00 1.50 March'17 June'17 September'17 December'17 Millions of Allowances

Zero Balance for Ontario

Quarterly Surplus Cumulative Surplus

March’17 June’17 September’17 December’17

Subscription 1 1 1 0.95 Quart Surplus (millions) 0.31 0.31 0.31 (0.93)

• Cum. Surplus (millions)

0.31 0.62 0.93

• Allowances Carried Over to 2018 (In Millions) : 0

www.climate-connect.com

WCI: State of Surplus around Undersubscribed Auction

• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 Mar'17 June'17 Sep'17 Dec'17 Mar'17 June'17 Sep'17 Dec'17

Auctions In The Unlinked Ontario Market

Quarterly Surplus Cumulative Surplus

Mar’17 June’17 Sep’17 Dec’17 Mar’18 June’18 Sep’18 Dec’18

Subscription 1 1 1 0.95 1 1 1 1 Quart Surplus (millions) 0.31 0.31 0.31 (0.93) (0.75) (0.75) 0.49 (0.75)

• Cum. Surplus

(millions) 0.31 0.62 0.93 (0.75) (1.49) (1.00) (1.75)

• Allowances Carried Over to 2018 (In Millions): 0

www.climate-connect.com

WCI: State of Surplus around Undersubscribed Auction

JA8 JA 9 JA 10 JA 11 JA 12 JA 13

Subscription 0.37 0.88 0.18 1 1 0.47 Quart Surplus (millions) (60.5) (0.1) (46.3) 16.9 18.5 (33.1)

• Cum. Surplus (millions)

44.0 43.9 (2.3) 14.6 33.1

• 80.0
• 60.0
• 40.0
• 20.0

0.0 20.0 40.0 60.0 JA 8 JA 9 JA 10 JA 11 JA 12 JA 13

Millions of Allowances

Zero Balance : WCI

Cumulative Surplus Quarterly Surplus

• Allowances Carried Over to 2018 (In Millions): 0

www.climate-connect.com

WCI: State of Surplus around Undersubscribed Auction

JA8 JA 9 JA 10 JA 11 JA 12 JA 13

Subscription 0.37 0.88 0.18 1 1 1 Quart Surplus (millions) (60.5) (0.1) (46.3) 16.9 18.5 18.1

• Cum. Surplus (millions)

44.0 43.9

• 2.3

14.6 33.1 51.2

• 80.0
• 60.0
• 40.0
• 20.0

0.0 20.0 40.0 60.0 JA 8 JA 9 JA 10 JA 11 JA 12 JA 13

All Remaining Auctions Fully Subscribed (2017)

Cumulative Surplus Quarterly Surplus

• Allowances Carried Over to 2018 (In Millions): 51.2

www.climate-connect.com

State of Surplus around Undersubscribed Auction

JA 8 JA 9 JA 10 JA 11 JA 12 JA 13

Subscription 0.37 0.7 0.1 0.5 1 1 Quart Surplus (millions) (60.5) (0.1) (46.3) (20.6) 7.4 18.1

• Cum. Surplus

(millions) 44.0 43.9 (2.3) (22.9) (15.5) 2.7

• 80.0
• 60.0
• 40.0
• 20.0

0.0 20.0 40.0 60.0 JA 8 JA 9 JA 10 JA 11 JA 12 JA 13 Cumulative Surplus Quarterly Surplus

Flexibility Estimation for Auctions in 2017

www.climate-connect.com

Conclusions

• Ontario is expected to be a net buyer
• Entry of Ontario into the WCI in 2018 shifts the expected shortage triggers by a

year

• A total of 130-150 million allowances are expected to carry over from 2020
• Allowance prices are projected to increase significantly as the cumulative

shortage is realized in 2024

• Anticipating this shortage early and acting on it can greatly minimize cost of

compliance

• Auction results only cause short-term fluctuations and over the next few years

the market is fundamentally tied to the floor

• Positive results for ARB in the Cal Chambers challenge removes the biggest threat

to auctions. As the extension of the cap-and-trade program becomes more definite, auctions should start clearing fully as market expects shortage in the long run

www.climate-connect.com

Q & A

www.climate-connect.com

THANK YOU

contact@californiacarbon.info