In 2021 the legislature passed and the governor signed Senate Bill 5126 creating the state’s Cap and Invest program, which is intended to greatly reduce carbon dioxide emissions in the state. Under the program, beginning this year, each regulated entity is required to obtain an “allowance” for every metric ton of carbon dioxide it emits and surrender that allowance to the department of ecology.

The Department of Ecology will hold “regular” auctions of allowances four times each year, in February, May, August and November. The first of these auctions was held on February 28 of this year. Each allowance sold at a regular auction is assigned a vintage year. An allowance cannot be used to satisfy compliance obligation for emissions in years prior to its vintage. The department sold Vintage 2023 allowances at this year’s February 28, May 31 and August 30 regular auctions. It also sold Vintage 2026 allowances at its May regular auction.

Results of the August 30 auction were announced today.

At regular auctions each bid specifies a price and the number of allowances the bidder is willing to buy at that price. Participants are allowed to make multiple bids. The “settlement” price is the lowest price for which the total number of allowances bid at that price or at higher prices equals or exceeds the total number of allowances that Ecology has offered to sell. All successful bidders pay the settlement price. Bids with prices strictly higher than the settlement price receive the full number of allowances requested. The remaining available allowances are prorated across bids with price equal to the settlement price.

Five percent of total allowances have been set aside in the Allowance Price Containment Reserve (APCR), a total of 6,000,000 for 2023.

The department may hold special auctions at up to four times per year of allowances from the APCR. APCR auctions are triggered if the price at a regular auction exceeds a threshold. For 2023 this threshold is $51.90. APCR allowances do not have a vintage and are functionally equivalent to Vintage 2023 allowances. In an APCR auction a participant can only bid one of two prespecified prices (the Tier1 and Tier 2 prices). A bidder can make separate bids at Tier 1 and Tier 2. The department held an APCR auction on August 9. The Tier 1 price was $51.90; the Tier 2 price was $66.68.

An entity emitting 10 tons in 2023 is required to surrender 3 allowances (which must be of vintage 2023) to the department of ecology in November 2024 and 7 allowances (which must be of vintage 2026 or earlier) in November 2027.

Ecology’s explanation of the Cap and Invest program is here.

Prices
The chart below shows prices for the auctions conducted so far this year. The June 2021 fiscal note for the bill establishing the Cap and Invest Program (Senate Bill 5126) assumed that the Washington program would be linked to California’s similar Cap and Trade program and that the average auction price of Vintage 2023 allowances would be $22.78. To date, no such linkage has been established. A September 2022 report prepared for the department of ecology by Vivid Economics, a London, England based consultancy, forecasted that without linkage to California’s program, the average auction price of a vintage 2023 allowance would be $63.92 in current dollars ($58.00 in constant 2021 dollars). The actual prices of Vintage 2023 allowances were $48.50 for the February regular auction, $56.01 for the May regular auction and $63.03 for the August regular auction, while for the August APCR auctions the Tier 1 and Tier 2 prices were $51.90 and $66.68 respectively. The weighted average of these five Vintage 2023 prices is $56.72.

In May the Department of ecology auctioned off 2,450,000 Vintage 2026 allowances. The price of these allowances was $31.12, much less than the $56.01 price of Vintage 2023 allowances that day. The Vintage 2026 price is anomalously low. Intercontinental Exchange futures prices suggest that the price of a Vintage 2026 allowance should be just 2% to 4% less than the price of Vintage 2023 allowance.