What does Ontario’s First C&T Auction of GHG Allowances really mean?

By all accounts, Ontario’s first Cap and Trade (C&T) auction of greenhouse gas (GHG) emissions allowances held on March 22, 2017 was a success.

auctioneer's hammer

The staff at the Ontario Ministry of the Environment and Climate Change (MOECC) should be applauded for a job well done. Not only is the auction process complicated, but it involves hundreds of millions of dollars. They also had the additional pressure of being in the spotlight and watched by the opposition, and media who were anticipating a flop.

The allowances auction is open mostly to registered participants in the C&T program with capped GHG emissions (mandatory and voluntary) at their facilities, and also market participants with no emissions. Over the next 4 years, capped participants will have their emissions caps reduced.  During this time, for every calendar year their capped emissions must match their free emissions allowances that the program provides.  If not, their excess emissions can be reconciled with allowances they can buy at the auctions.  

The first of the four emissions allowances auctions that will be held in 2017, the auction generated more than CAD$472 million. For sale were mostly allowances of “current 2017”, and a much smaller amount of “future 2020” vintages. Of the 25 million 2017 vintage allowances, 100% were sold, 99.1% of which were bought by capped participants.  Without a doubt, this was a fantastic response. 

Of the 2020 vintage allowances, 812,000, or 26% were sold, and bought by capped participants.  This is respectable because they are being purchased 4 years in advance, in anticipation that the price of allowances will be higher at that time. 

For the government of Ontario, the sell-out of the first auction’s 2017 vintage allowance is encouraging as a new source of revenue for its coffers, but also indicative of the support of the C&T program by the participants.

Of the 47 registered bidders, all but one of them were capped participants. The majority of the bidders were from the oil and energy sector, and showed a keen interest.  Although the program is transparent, and accountable, the auction itself is confidential.

The first auction started with a reserve price of $18.07 per metric tonne of emissions allowances for both the 2017 and 2020 vintages. The settlement price was at $18.08 for the current 2017 vintage, or, one lot of 1,000 allowances had a settlement value of $18,090.  For the price to remain stable is commendable given some of the volatility in the Californian C&T program in recent months. The highest bid price for the 2017 vintage was $49.41/tonne, which is close to the federal government’s carbon price of $50 per metric tonne slated for 2022.  The settlement price for the 2020 vintage allowances remained at $18.07. 

The number of allowances offered at the first auction was large: 25,296,367 of the 2017 vintage, and also 3,166,700 of the 2020 vintage. At each auction, a capped participant cannot purchase more than a maximum of 25% of the available vintage allowances, which was 6,324,091 at this auction. At $18.08 per metric tonne, this amounted to a maximum purchase of $11,455,957. Bidders are required to commit the funds for bidding prior to the auction.

A main attraction of the emissions allowances is that they are financial instruments with a finite end date.  This means that participants can free up the capital to pay for the improvements at their facilities to reduce their emissions, and possibly make a profit on the assumption that the price of carbon will be higher than $18.08/tonne in four years’ time.  The oil and energy companies certainly think so.

What is clear is that the C&T program is offering millions of dollars free to capped participants to modernize their facilities to significantly reduce their emissions.  Who wouldn’t want to take advantage of free millions?

An important requirement of the C&T program is that registered participants must maintain their information so that it is up-to-date, regardless of whether the participant is purchasing allowances at auction, or not.

The second Ontario auction for emissions allowances is scheduled for Tuesday, June 6, 2017 when the same amount of 2017 vintage, and 2020 vintage allowances will be put on the block. Be aware the clock has already started ticking to meet the many strict deadlines and protocols prior to the auction date.  These take time, and are required to be done correctly to be able to bid.  That deadline is Thursday, April 27, 2017.

Capped participants wishing to buy allowances in the second auction need to start now at reviewing their accounts. Changes to a capped participant’s status, including changes to a participant’s Primary Account Representative (PAR), Alternate Account Representative (AAR), or Account Viewing Agent (AVA) needs to be done by Thursday April 27, 2017.

Do not delay as the cost will surely go up.

SMV Energy Solutions has two registered agents in CITSS in the jurisdiction of Ontario, and can be a capped participant’s PAR, AAR, or AVA.

Sharolyn Mathieu Vettese
SMV Energy Solutions


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