Background for today’s APCR Auction
An Allowance Price Containment Reserve (APCR) auction is being held under Washington state’s Climate Commitment Act (CCA) today, August 9th from 10am to 1pm.
By definition, the APCR is “an account maintained by Ecology with allowances available for sale through separate reserve auctions at predefined prices to assist in containing compliance costs for covered and opt-in entities in the event of unanticipated high costs for compliance instruments.” (WAC 173-446-020).
As price tiers are pre-determined based on September 2022 rule-making and the December 2022 Annual Allowance Price Containment Reserve Announcement (Tier 1: $51.90; Tier 2: $66.68), the primary unknown is how many of the 527,000 allowances at each price tier will sell. This volume will represent 5.8% of allowances offered at auction to-date, including the first two auctions in February and May.
The CCA was designed with various mechanisms to moderate and stabilize market prices below the price ceiling, and the APCR is the first of these to come into play. An APCR auction is required when allowances sold at any one of the quarterly auctions exceed a predetermined trigger price. An APCR auction is also to be held “Once each year before the compliance deadline.” (WAC 173-446-370). In 2023, the trigger price is $51.90, which was exceeded for the first time at the Auction #2 in May when the majority of allowances offered went for a settlement price of $56.01 (a smaller volume of allowances, sold ahead of time from the 2026 allowance pool, sold for $31.12).
The APCR allowances come from a set of allowances under the CCA’s 2023-2030 allowance budget or cap. These APCR allowances were initially set aside and reserved for auction if certain price points were surpassed in any single auction, if new covered parties entered the program, and once each year before any compliance deadline. Pulling these allowances back into the market is designed to moderate annual allowance prices for covered entities by providing additional opportunities to obtain sufficient allowances for compliance. The first compliance is due in November 2024, to cover 30% of emissions from this year.
In a June conversation with the Washington State Standard, Department of Ecology spokesperson Claire Boyte-White described the intent of the APCR auction: “This is what the program is designed to do. This is not an emergency.”
The latest settlement price of year 2023 vintage allowances ($56.01) is well above the conservative forecast used for developing the biennial budget ($32.65) but remains below economic modeling efforts conducted on behalf of Ecology by Vivid Economics ($58 to $68 with no program “linking” to California and Quebec, and depending on the volume of APCR allowances available).
When Vivid Economics forecast a price of $58.31 in the “primary analysis” scenario, this was equivalent to the assumed price point of the higher of the APCR price tiers (Tier 2). Over 10.3 million APCR allowances were forecast being sold in that modeling effort. Without additional APCR allowances available through “frontloading”, the Vivid Economics modeling forecast the sale of nearly 3.2 million APCR allowances and an average allowance price in 2023 of $68 – above the Tier 2 price.
Ecology’s methodology for determining the volume of APCR allowances offered in the August APCR auction can be found on their Auctions & Market webpage. The August APCR auction is releasing 527,000 allowances at each of the two price tiers ($51.90 and $66.68), for a total of 1,054,000 allowances. This is far below the 3.2 million allowances assumed in the lower-supply, higher-price Vivid Economics scenario, although more APCR auctions may be released later in 2023. Any unsold allowances, regardless of price tier, will remain at the APCR and will be offered again, if necessary, redivided equally between Tier 1 and Tier 2 APCR allowances.
APCR allowances may be used directly for compliance only and are only available to covered entities and not for other participants who may hold or trade allowances but do not have a compliance obligation. The first compliance obligation is due in November 2024 to cover 30% of this year’s emissions.
We can anticipate the impact of the APCR auction on average allowance prices and state revenue to-date based on the predetermined price tiers. If all Tier 1 allowances sell, $27.35 million will be raised and the average price of all allowances purchased in auction to-date will be $49.83, up from $49.77 currently. If all Tier 2 allowances sell, a total of $62.49 million will be raised in state revenue, pushing the average of all allowances purchased to-date up by approximately fifty cents to $50.32.