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Cap and trade program kicks off with the first Ontario Auction

April 2017

On March 22, 2017, the Ministry of the Environment and Climate Change (MOECC) held the first Ontario cap and trade auction (Ontario Auction).  The results were published on April 3. 

In accordance with the Ontario Cap and Trade Program Regulation (O. Reg. 144/16), the Ontario Auction Reserve Price (minimum floor price) was determined as the higher of the most recently published California and Québec Annual Auction Reserve Prices after applying the exchange rate established for the auction.  The Ontario Auction Reserve Price was set by California’s at $18.07 CDN/tonne CO2e.  

In this auction, the MOECC offered allowances for both the current year of 2017 (Current Auction) and the future year of 2020 (Advance Auction).  The settlement price for the Current Auction hovered slightly above the reserve price at $18.08 (a premium of 0.06%) reflecting that demand was greater than supply such that 100% of allowances offered were sold.  These results are similar to that of the first California-only auction that occurred on November 14, 2012 in which the auction price settled at a premium of just 0.9% above the reserve price.

For the Advance Auction, the settlement price settled at the reserve price of $18.07 given that only 26% of the allowances offered were sold.  What is interesting to note is that the Herfindahl-Hirschman Index (HHI) for the Advance Auction was just below 10,000, suggesting that the majority of the future allowances offered were purchased by one company (a monopoly). (HHI is a measure economists use to evaluate market concentration.)

Overall, the Current Auction generated approximately $457 million and the Advance Auction generated an additional $15 million that will be used by the province for the Climate Change Action Plan initiatives.

Prior to this auction, Union Gas, Enbridge Gas Distribution and Natural Resources Gas each filed an application with the Ontario Energy Board (OEB) seeking approval of interim rates to recover their cap and trade costs.  Union Gas and Enbridge used a forecasted cost of $17.70 CDN/tonne CO2e as the basis for determining their rates.  However, the settlement price for the Current Auction was about 2.15% higher than what was filed by these gas utilities.  The spread will be accounted for through a true-up methodology such as deferral accounts for each gas utility.

About a quarter of Ontario’s registered participants had qualified bids in this auction. Registered participants are not required to participate in every auction so long as they meet their compliance obligation by 2021.  Some registered participants may have stood on the sidelines of the first auction to simply observe the market and gain a better understanding.  That being said, the majority of participants in the first Ontario Auction were capped participants including all three gas utilities – and there was one market participant (a party with no compliance obligation, presumably buying allowances for future resale). 

The next Ontario auction is to take place on June 6, 2017.  If Ontario trends in parallel with the previous California auctions, the next auction may experience a greater spread between the reserve price and settlement price.