Ontario will hold its first Cap and Trade Program Auction of Greenhouse Gas Allowances tomorrow, March 22, 2017, from 13:00-16:00.

The Auction Notice is posted on the Ministry of Environment and Climate Change ("MOECC") website. As required, the Notice sets out the important auction details, including auction timing, the number of allowances offered for sale, and Annual Auction Reserve Prices for Québec and California.

Auction reserve price

As explained in a previous article, Upcoming Ontario cap and trade auction and proposed regulatory amendments, the MOECC calculates the "Reserve Price", or the minimum bid price, for each Ontario auction using the higher of the most recently published California and Québec Annual Auction Reserve Prices. California's most recent Reserve Price was $13.57 (USD) for both current and advance allowances, while Québec's was $13.56 (CAD). Therefore, for this auction, the Ontario Reserve Price will be calculated based on the higher California Reserve Price.

The final Reserve Price is set the day before the auction based on the Bank of Canada exchange rate the day before, or on a date as close as possible to, the auction. Due to the relative strength of the U.S. dollar, if we apply yesterday's Bank of Canada daily average exchange rate (1.3358) to California's higher Reserve Price, the Ontario Auction Reserve Price would be $18.13 (CAD), significantly higher than the Québec Reserve Price.

Today's official Bank of Canada daily average exchange rate will be posted on the Bank of Canada website by 4:30 p.m. and the Ontario Reserve Price will be posted on the Auction website by 17:00.

Auction results

It is difficult to know what to expect going into the first Ontario auction. However, it seems unlikely that participants will bid particularly aggressively at this stage since it is only the beginning of the four year compliance period, and participants still have several years to obtain sufficient carbon allowances to meet their regulatory requirements. In addition, many participants have received a significant number of free allowances. As a result, we expect that the "Settlement Price", the price the participants actually pay for carbon allowances, will likely end up very close to the Reserve Price.

Similarly, while 25,296,367 current (2017) allowances and 3,116,700 advance (2020 vintage) allowances will be offered for sale, participants are unlikely to buy all of them at this stage.

The final auction results will be posted on the MOECC website on April 3, 2017 at 15:00.