Recently, the Quebec and California governments announced the results of the May 2016 Cap and
Trade System Joint Auction. The results show that only around 10%
of the greenhouse gas allowances (credits) offered for sale by the
Quebec government were purchased, and only around 2% of the credits
offered for sale by the California government were purchased. This
means that the proceeds from the auction were much less than may
have been expected. Presumably, this raises problems for these
governments, which have previously announced plans to use the
auction proceeds to fund public projects. It may also signal that
the revenue projections from Ontario's soon-to-be-implemented
cap and trade system could turn out to be overstated.
Concerns about the results of the recent Cap and Trade System
Joint Auction were described in a news article from the Los Angeles
Times. As stated in that article, the California
government had been expecting revenues of around $600 million from
each quarterly auction, with much of the proceeds going towards a
high-speed rail project. While the proceeds from earlier auctions
met expectations, this most recent auction only provided around $10
million in revenues. Concerns about the recent auction results are
also discussed by Canadian commentators, for example in a column in the Financial Post and an article from Energy Probe. According to the
sources linked above, an oversupply of previously purchased or
acquired credits is one reason for the poor results of the recent
auction. This has led to carbon credits being sold on the secondary
market at prices below the bid floor price in the auction.
Additionally, uncertainty in California as to the future of the cap
and trade system may be causing market players to adopt a
"wait and see" attitude rather than purchasing credits
now. One main cause of this uncertainty is a pending court proceeding that seeks to
terminate the cap and trade system because it is an unauthorized
tax. Another main cause of the uncertainty comes from the fact that
the California cap and trade system expires in 2020, unless
As we have
previously discussed, Ontario plans to link its cap and trade
system with the joint auction process for Quebec and California.
The lack of interest in the recent public auction raises questions
for Ontario's plan. As we have discussed (see
here), the Ontario government plans to invest the proceeds from
the sale of carbon credits into a variety of programs and
initiatives aimed at reducing greenhouse gas emissions in the
province. As we noted, The Globe & Mail recently obtained a
copy of a draft of the government's climate change action
discussed in cabinet which calls for spending of more than $7
billion in order to implement sweeping changes to achieve emission
reduction targets. Clearly, the auctions of credits offered by the
Ontario government will have to be very successful in order to
generate that level of revenue. To the extent that there are
already surplus credits available for sale on the secondary market,
and to the extent that new credits are not being sold at the
offering prices, this raises doubt as to how the revenue
projections will be achieved. According to a recent CBC news article, Premier Wynne has
acknowledged that there will be highs and lows in the market for
carbon credits, and that this could lead the Ontario government to
revise its projections for cap and trade revenues.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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