US: Offset demand rising after invalidation – market sources

Offset demand is continuing to grow in 2015 after seeing steady demand in the final few months of last year, but the market is shifting to credits with at least some level of protection following the invalidation of nearly 89,000 credits, market sources said.

The Air Resources Board (ARB), the cap-and-trade regulator, allows companies to use offsets to cover up to 8% of their compliance obligation. Those credits can be invalidated up to eight years after being issued under ARB rules.

In a controversial decision, the ARB invalidated nearly 89,000 credits for a secondary violation at an Arkansas incineration facility that was found to not be in compliance with all federal, state or local environmental, safety or health laws (see EDCM 14 November 2014). The ARB requires regulatory compliance for all offset projects.

Since then, market participants said offset demand has recovered with buyers showing more interest in so-called Golden California carbon offsets (CCOs), or credits with protection against invalidation.

“There is lots of activity with maybe a bit more on the goldens,” a trader from a trading house said. “People are seeing that invalidation is actually a real possibility.”

A broker said the demand has risen significantly in the market and caused prices to rise accordingly. The broker said the invalidation investigation stifled demand last year, but the market is showing healthy demand in the first month of 2015.

Other market participants, however, said the market is still slowly growing with buyers only interested in a small size of offsets.

It is unclear exactly how many offsets have been transacted in 2015, because most of those deals are done through bilateral over-the-counter deals. The InterContinential Exchange (ICE), which does most of the allowance volume, does not trade offsets.

Prices potentially could rise more, traders say

As a result of that demand, Golden CCO prices have risen to the $10.95-11.25/tCO2e range on the secondary market, and some market participants said those offsets could continue to grow.

Golden CCOs had been in the mid-$10.00/tCO2e range for most of 2014, but the invalidation case and the rise of California carbon allowances have contributed to the increase in demand that has sparked higher Golden CCO prices.

A second broker said Golden CCOs should be valued at a 8-10% discount to carbon allowances. Those prices would be roughly in the $11.48-11.73/tCO2e range based on current allowances prices. The current market values Golden CCOs at a 10-15% discount to California carbon allowances, which were valued at $12.75/tCO2e on Monday.

An offset developer said the market still has room to grow because of the rising CCA prices over the past several months. The developer said compliance entities are also getting more confident in the product and process for buying them.

“A number of parties have now done deals and proven their approach to offsets so [they] may be in a position to start ramping up,” the developer said.

Offset use is expected to rise in California in 2015 as the programme expands to include fuel and natural gas suppliers. Higher carbon allowances prices are also believed to spur some demand to the offset market. Dan X. McGraw