Decoding Ontario s Carbon Market

Transcription

1 Decoding Ontario s Carbon Market A short and long term impact analysis of the first auction April 12, 2017 Photo by Kevin W

2 Meet your presenters Chandan Kumar Lead Economist Climate Connect Billy Hamshaw Product Manager CaliforniaCarbon.info

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

4 Forecast Models 2030 WCI Carbon Triptych 2030 WCI Price Allowances Long-term Offset Generation

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

6 Offsets CCO Tracker ROC Tracker OTC Prices Weekly commentaries & Features

7 News Weekly News Round-up Interviews Guest features and more Downloadable APIs Webinars and one-on-one discussions Events

8 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

9 WCI Carbon Market

10 WCI Carbon Market Western Climate Initiative (WCI) Carbon Market s Allowance Demand Breakdown Western Climate Initiative: Collaboration among 26% 26% 17% 0% 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 12% 12% 83% 62% 62% 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 California Quebec Ontario MMtCO 2 e (CA+QC+ON)

11 Ontario Cap-and-Trade

12 Ontario Cap-and-Trade Bill 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 Cap emissions at MMt in 2017, drops at over 4% per year to MMt in 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 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

13 Emissions Forecast

14 GHG Emissions (In million tons) Ontario 2030 Capped Sector GHG Emissions Forecast Historical Base Case High Case Low Case Capped sector emissions is projected to decrease by 14.4% between 2014 and 2030, when it reaches MMtCO 2 e. Low emissions (2030) MMtCO 2 e High emissions (2030) MMtCO 2 e

15 Ontario Supply and Demand Forecast

16 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: ( ) - ± 43 million The extent of 8% usage depends however on the entity size Most Ontario entities covered under CP1 ( ) are expected to be below 2.5 MMtCO 2 e Conservative estimated cumulative demand for offsets: CP1: ( ) ± 10.8 million

17 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.?

18 Allowances (In millions) Ontario Allowance Supply and Demand Scenarios Base case demand Low Demand High Demand Supply; 37% target The allowances budget is expected to decline in coordination with other WCI partners during to reach 92.4 million from 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.

19 Annual Allowances Shortage (In Millions) Cumulative Allowances Shortage (In Millions) Expected Ontario Allowance Shortage under Baseline Scenario without Linkage (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 The cumulative shortage for an Ontario stand alone market would trigger as early as 2018.

20 WCI Emissions Forecast

21 Emissions (In million tons) WCI Emissions (In million tons) Capped Sectors GHG Emissions Forecast California Quebec Ontario WCI - Capped Sector Emissions Forecast (In million tons) California Quebec Ontario WCI

22 WCI Supply and Demand Forecast

23 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 demandmitigating factors such as offsets and leakages.

24 In Millions WCI Offsets Usage (In millions) Expected Offsets Usage California Ontario Quebec WCI

25 Offsets Demand Scenarios CA-QC Maximum theoretical demand for offsets based on full 8% usage: CP2: ( ) - ± 96 million CA-QC Conservative estimated demand for offsets based on entity size: CP2: ( ) - ± 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 ( ): Max theoretical demand ± 615 million Conservative estimated demand ± 287 million

26 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 Complianceeligible 29,103,301 Buffered 6,413,106 Retired 20,862,639 Invalidated 88,955

27 Allowances (In Millions) WCI Allowance Supply and Demand Scenarios 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; M 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

28 Annual Allowances Shortage (In millions) Cumulative Allowances Shortage (In millions) WCI Allowance Surplus-Shortage (Base case) (20) (40) (37) (100) (200) (60) Annual Shortage Cumulative Shortage (300) 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

29 WCI Carbon Price Forecast

30 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

31 Average Allowance Price (US$) WCI Carbon Allowances Prices Scenarios Price Floor Base Case Emissions Low Emissions High Emissions

32 WCI Auctions

33 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.

34 Auctions- Historical JA 2 JA 3 JA 4 JA 5 JA 6 JA 7 JA8 JA9 JA10 Qualified Ratio Volume Cleared (Millions) Clearing Price (US$) Auction Reserve Price (US$)

35 Scenarios for the year ahead

36 Millions of Allowances Ontario: State of Surplus around Undersubscribed Auction 1.50 Zero Balance for Ontario (0.50) March'17 June'17 September'17 December'17 (1.00) (1.50) Quarterly Surplus Cumulative Surplus March 17 June 17 September 17 December 17 Subscription Quart Surplus (millions) (0.93) Cum. Surplus (millions) Allowances Carried Over to 2018 (In Millions) : 0

37 WCI: State of Surplus around Undersubscribed Auction Auctions In The Unlinked Ontario Market Mar'17 June'17 Sep'17 Dec'17 Mar'17 June'17 Sep'17 Dec'17 Quarterly Surplus Cumulative Surplus Mar 17 June 17 Sep 17 Dec 17 Mar 18 June 18 Sep 18 Dec 18 Subscription Quart Surplus (millions) Cum. Surplus (millions) (0.93) (0.75) (0.75) 0.49 (0.75) (0.75) (1.49) (1.00) (1.75) Allowances Carried Over to 2018 (In Millions): 0

38 Millions of Allowances WCI: State of Surplus around Undersubscribed Auction 60.0 Zero Balance : WCI JA 8 JA 9 JA 10 JA 11 JA 12 JA Cumulative Surplus Quarterly Surplus JA8 JA 9 JA 10 JA 11 JA 12 JA 13 Subscription Quart Surplus (millions) (60.5) (0.1) (46.3) (33.1) Cum. Surplus (millions) (2.3) Allowances Carried Over to 2018 (In Millions): 0

39 WCI: State of Surplus around Undersubscribed Auction All Remaining Auctions Fully Subscribed (2017) JA 8 JA 9 JA 10 JA 11 JA 12 JA 13 Cumulative Surplus Quarterly Surplus JA8 JA 9 JA 10 JA 11 JA 12 JA 13 Subscription Quart Surplus (millions) (60.5) (0.1) (46.3) Cum. Surplus (millions) Allowances Carried Over to 2018 (In Millions): 51.2

40 State of Surplus around Undersubscribed Auction Flexibility Estimation for Auctions in JA 8 JA 9 JA 10 JA 11 JA 12 JA Cumulative Surplus Quarterly Surplus JA 8 JA 9 JA 10 JA 11 JA 12 JA 13 Subscription Quart Surplus (60.5) (0.1) (46.3) (20.6) (millions) Cum. Surplus (2.3) (22.9) (15.5) 2.7 (millions)

41 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 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

42 Q & A

43 THANK YOU