SAN FRANCISCO, Jan 6 (Reuters) - California’s newly expanded carbon market is off to a better-than-expected start to the year, with strong trading volumes driven by new participants, traders said on Tuesday.
The market’s benchmark December 2015 (v15) contract settled at $13.10 a tonne on Tuesday, up 8 cents from the previous day’s close on the IntercontinentalExchange.
Traded volumes on Tuesday topped 2.7 million allowances, well above the average daily volumes last year, traders said, with buyers picking up allowances for a range of delivery dates.
“Volumes are certainly heavy,” one broker said on Tuesday. “We’re seeing more emphasis on Q1 than we have in the past,” he said, referring to a surge of demand this week for contracts that would deliver allowances later this month and next.
The two-year-old market more than doubled in size at the start of the year by expanding to cover distributors of transportation fuels such as gasoline and diesel as well as providers of home heating fuels like natural gas.
One trader said oil companies and others are already hedging their carbon exposure to match what they think their gasoline sales will be this year.
The environmental program also slightly tightened the amount utilities, oil refineries and manufacturers can emit under the program, which traders said could also boost demand for permits.
Despite the strong start, analysts forecast that the market will be long allowances over the next few years due to lower-than-expected emissions as a result of the still-recovering California state economy. If so, that would depress carbon prices over the short and medium term.
The first major test for the expanded market will come on Feb. 18 when the state holds its first carbon permit auction of the year.
The state, along with new trading partner Quebec, will put 73.6 million permits covering emissions this year and 10.4 million allowances covering 2018 emissions on the block, making it the program’s largest auction ever.
If the state manages to sell all of those permits, it will further stimulate secondary market buying, pushing prices up further, traders said.
“If that auction is a success, the market should continue to go higher,” a trader said. (Reporting by Rory Carroll; Editing by Ken Wills)