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Ontario’s first Cap and Trade Auction results

Ontario’s first cap trade auction sold out all current allowances, giving the new market a strong start, but the province’s environment minister warned the real test of the system will be in the emission reductions it brings about. Please read more in this insightful article by Benjamin Ojoleck, Articling Student, Gowling WLG International Limited.

cap trade auctionOntario held its first Cap and Trade Program Auction of Greenhouse Gas Allowances on March 22, 2017. The results of the auction were published on the Ministry of Environment and Climate Change website.

The auction drew 47 qualified bidders. Of the total number, approximately half are members of the energy industry.

As expected, the “Settlement Price”, the price that the participants actually paid for the carbon allowances, was almost identical to the “Reserve Price” (the minimum acceptable bid price). The Reserve Price was set at $18.07 for current (2017) allowances, and the final Settlement Price was $18.08. Similarly, both the Reserve Price and Settlement Price for the advance (2020) allowances were $18.07. Participants still have three more years to obtain enough allowances to meet their regulatory requirements.

Interestingly, all available 25,296,367 current (2017) allowances were purchased, while only 812,000 advance (2020 vintage) allowances out of a total 3,116,700 were sold. In fact, the total qualified bids exceeded the available number of allowances for the current vintage by 16%.

Of particular interest is the calculation of the Herfindahl-Hirschman Index (HHI) following the auction. The HHI is an indicator of market concentration, and provides an insight into the relative proportions of carbon allowances purchased by each bidder. To calculate the HHI, the percentage of allowances purchased by each winning bidder is squared, then summed together across all winning bidders.

For example, in an auction where all allowances are purchased by a single bidder, the HHI would be 10,000 (100 x 100 = 10,000). Conversely, if a large number of bidders each purchases a proportionately smaller number of shares, the HHI will be close to 0.

The results of the March 22, 2017 auction show an HHI of 9,211 for the advance (2020 vintage) allowances. This indicates that a single bidder purchased a very significant majority of the overall available allowances, with smaller numbers of allowances being bought by other participants.

For comparison, the HHI of the current (2017) allowances is 1,705, indicating that a large number of bidders each purchased a proportionately small number of allowances.

The auction raised over $472 million in proceeds. These funds are to be directed toward accomplishing the goals of the Ontario Climate Change Action Plan.

For further information on the methodology of the Cap and Trade Auction, see our previous article on the topic.

By: Benjamin Ojoleck, Articling Student, Gowling WLG International Limited

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