The Ontario Ministry of the Environment and Climate Change (MOECC) held the first auction of greenhouse gas (GHG) allowances on March 22, 2017 and published the auction’s results on April 3, 2017. All 2017 allowances were sold at the auction at a settlement price of C$18.08 per tonne of GHG.

For further details of the new cap-and-trade legislative measures, please see our May 2016 Blakes Bulletin: Ontario Announces Significant Climate Change, Cap-and-Trade, GHG Emissions Legislative Developments and the government website for the cap-and-trade regime.

ALLOWANCES

At the end of each compliance period, mandatory participants in the cap-and-trade program must have enough allowances to equal their emissions. Companies that require additional allowances to match their emissions can buy them at an auction or on the secondary market. The MOECC has outlined that there are two ways they can purchase allowances on the secondary market: (i) a registered participant in the cap-and-trade program can directly negotiate and buy allowances from another company that holds allowances; or (ii) registered participants can buy allowances through a financial instrument, like a futures contract that is typically bought and sold on a financial exchange. With respect to such exchange traded derivatives, vintage 2017 futures and options are currently offered by Intercontinental Exchange, which also trades in California allowance futures and options.

AUCTION

The GHG allowances auctions will be held four times per year during the 2017–2020 compliance period. The auctions are administered in a sealed-bid format and an online platform. All participants submit bids at the same time without seeing other’s bids. A party must be registered and approved in the compliance instrument tracking system service as a mandatory, voluntary or market participant of Ontario’s cap-and-trade program before it can participate in an auction. The results of the auction must be posted on the MOECC webpage within 45 days of the auction.

RESULTS

Allowances were offered at the auction for the current vintage budget year (2017) and a future vintage budget year (2020).

  • 2017 allowances (current vintage): over 25 million (25,296,367, to be exact) were available for sale and sold. The settlement price was C$18.08. The highest bid was C$49.41.
  • 2020 allowances (future vintage): over 3 million (3,116,700, to be exact) were available for sale and 812,000 were sold. The settlement price was C$18.07. The highest bid was C$27.69.
  • There were 47 qualified bidders (out of 232 registered participants in the cap-and-trade scheme);
  • The auction proceeds total approximately C$472-million;
  • The market monitor of the auction confirmed that the auction was cleared in a manner consistent with the auction clearing rules in the Ontario Cap and Trade Program Regulation.

The summary results report provides further details of the auction’s results.

Although the auction’s results — the sale of all of the 2017 allowances and a large number of 2020 allowances — were positive, the MOECC has stated that the true barometer of success will be whether GHG emissions are reduced.

The settlement prices are at a similar level to the most recent settlement price (US$13.57) of the joint Californian and Quebec auctions (Joint Auctions) and the fact that the two settlement prices were similar follows the pattern of the Joint Auctions. Furthermore, the Joint Auctions’ settlement price is most often the floor minimum price. The first five Joint Auctions sold all the current vintage allowances, but there have been considerable variations in the success of the recent auctions in terms of the number of allowances sold (in May 2016 only 10 per cent of the allowances were sold). It will be interesting to monitor the results of the future Ontario 2017 auctions, which are scheduled for June 6, 2017, September 6, 2017 and November 29, 2017. Ontario intends to link the cap-and-trade program with the Californian and Quebec systems in 2018 and establish a Californian, Quebec and Ontario joint auction.