California-Quebec carbon allowance costs hit record high for third time in a row

California and Quebec's joint cap-and-trade program saw a record-high settlement price for greenhouse gas emission allowances at $41.76/mt -- the third time in a row the record high has been breached, California Air Resources Board data showed Feb. 22.

The settlement price for Auction 38, the first quarterly auction of 2024 held on Feb. 14, represents a 7.82% increase from the previous record set in the fourth quarter of last year. This latest settlement price is also a 50% increase year on year.

The clearing price represents a premium to secondary market prices as of auction day on Feb. 14, said Matt Williams, emissions and clean energy analyst at S&P Global Commodity Insights. This is the second auction in a row where the auction price cleared above the comparable secondary market, he said.

The $41.76 clearing price was 56 cents higher than the secondary market on the auction day, or 1.4% higher, Williams said.

"Secondary market prices have cooled off a bit, trading sideways in February for the most part," Williams said. "But still, given that Q1 auctions typically settle above the prior auction based off of the new auction floor... this new record isn't all that surprising."

Auction details

Auction 38 from CARB and Quebec's Ministry of Environment and the Fight Against Climate Change sold 51.2 million vintage 2024 allowances as well as 7.2 million advance vintage 2027 allowances.

All of the available 58,427,056 emission allowances were sold, with 86.5% sold to compliance entities. This percentage is up from the previous auction at 80.39%.

The total 58.4 million allowances in Auction 38 represents a 1.4% increase from the previous auction and a 3.6% increase year on year.

The settlement price for the advance 2027 auction was $41/mt, a 9.6% increase from the previous auction and a 51.8% increase year on year. Compliance entities won 74.8% of the 2027 emission allowances.

Linkage with other programs

The Washington State Department of Ecology proposed legislation to the state's legislature in January that would allow for linkage of Washington's cap-and-invest program with California and Quebec's joint program.

Linkage would create a more liquid market that could bring down clearing prices in Washington carbon auctions, Ecology representatives say. The bill passed the state senate Feb. 12.

California has regulatory and legislative requirements that must be met before linkage can be considered, a CARB representative told S&P Global. For example, a potentially linking program must have equivalent or stricter greenhouse gas reduction programs compared to California.

Washington's legislative session could be consequential for the state's carbon market. An initiative in the state that would allow voters to consider overturning Washington's Climate Commitment Act and eliminate its carbon market is likely to appear on ballots this November.

Critics of the program say it drives up gasoline prices. Republicans proposed a carbon auction rebate bill that would turn some of the cap-and-invest program's surplus revenue into checks for Washington residents to cover increased costs at the pump.

California previously linked its cap-and-trade program with Quebec in 2014.