Quebec set to launch carbon market with first permit auction

SAN FRANCISCO Mon Dec 2, 2013 6:37pm EST

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SAN FRANCISCO Dec 2 (Reuters) - Some of Quebec's biggest polluters will be able to buy carbon permits at the Canadian province's first such auction on Tuesday, a key step toward linking its cap-and-trade program next year to a similar effort in California.

The 40 or so emitters in Quebec will be on the hook to pay for emissions from roughly 70 facilities.

Participation in the auction is likely to be limited to some of the province's largest polluters, including metals companies such as Rio Tinto Alcan and Xstrata, as well as energy companies such as TransCanada Corp.

Smaller companies and speculators are also allowed to buy permits at the auction to trade on secondary markets or bank for use in later years, for example when the program expands to cover businesses that distribute fuels in 2015.

Some Quebec emitters have already started hedging by participating in California's auctions. Some will want to practice at Quebec's auction, while others will want to carry out marquis first trades.

Traders active in the year-old California carbon market said it was difficult to forecast where the allowances would clear at the inaugural auction.

"I've heard people say it will definitely clear at a discount to California and others say it will clear at a premium," said one trader, referring to the clearing price of California's most recent auction, where allowances fetched a year-low of $11.48 per tonne despite strong demand.

"I'm leaning toward a slight premium due to new auction jitters. During the first auction, people come in who don't know about bidding strategies and they tend to overpay."

Another trader said he was bearish on the Quebec auction and expects participation to be weak.

"The rules for participation are quite restrictive and the floor price is too high to attract serious arbitragers," he said.

The floor price for the Quebec auction is C$10.75/t (US $10.10). It is set to rise 5 percent plus inflation next year. California's floor price during 2013 was US $10.71/t and is set to increase to US $11.34/t in 2014, the state announced on Monday.

The first trader said many California emitters, who will be able to use Quebec permits to meet their compliance obligations, are planning to wait to engage with the Quebec market until the systems are fully linked next year.

"This year's result may not be indicative of future auctions when holding joint auctions," he said.

California and Quebec are expected to hold their first joint allowance auction next year, although the exact date for that sale has yet to be announced.

The results of Quebec's first carbon auction will be announced on Friday at 9 a.m. EST (1400 GMT).

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