Nova Scotia holds its third cap-and-trade auction

Nova Scotia held its third Auction of Emission Allowances on June 9, 2021 under the province’s cap-and-trade program. All 767,000 vintage 2020 emission allowances offered through the auction were sold at the auction settlement price of $36.71.

Province’s cap-and-trade program

Nova Scotia’s cap-and-trade program (which came into effect in January 2019 via the Cap-and-Trade Regulations made under the province’s Environment Act [PDF]) sets annual limits or “caps” on the total amount of greenhouse gas (GHG) emissions allowed in the province. Mandatory participants in Nova Scotia’s cap-and-trade program include:

• Facilities generating 50,000 tonnes or more per year of GHG emissions from sources covered by the program;
• Petroleum product suppliers that place 200 litres or more of fuel into the supply chain per year on the Nova Scotia market for consumption in the province;
• Natural gas distributors that deliver natural gas for consumption in Nova Scotia that, when combusted, produces 10,000 tonnes of GHG emissions or more per year; and
• Electricity importers that import electricity into the province for consumption in the province and whose GHG emissions from the generation of the electricity imported is greater than 10,000 tonnes of GHG per year.

Each year, the Nova Scotia government creates a set number of emission allowances that can be put in circulation equal to that year’s province-wide cap. While the province distributes most of the emission allowances free of charge to mandatory participants, some are sold through auction and some are set aside for sale through a government-held reserve. Mandatory participants can also buy emission allowances on the secondary market from other participants who have emission allowances for sale.

The compliance period for Nova Scotia’s cap-and-trade program is from 2019 to 2022. Each year of the compliance period, the cap declines, resulting in a smaller supply of available emission allowances. In December 2023, after GHG emissions for the 2019-2022 compliance period are verified, mandatory participants are required to “true up” and have in their compliance account one emission allowance for each tonne of GHG that the mandatory participant emitted over the course of the compliance period.

The allowance auctions

The province is required to hold an auction of emission allowances two to four times in a calendar year. Every mandatory participant in the cap-and-trade program that wishes to participate in an auction is required to register as a bidder and submit a financial guarantee to the province before the auction opens.

Emission allowances are auctioned in lots of 1,000 emission allowances. In 2020, the inaugural auction year under Nova Scotia’s cap-and-trade program, the minimum price (the Auction Reserve Price) was $20 per emission allowance and, for each year thereafter, the Auction Reserve Price, as adjusted for inflation, increases by 5%.

At the close of each auction, the province awards emission allowances beginning with the bidders that submit the highest bids. The final sale price per emission allowance (the Settlement Price) is the lowest price bid for which the province awards emission allowances available in the auction. The Settlement Price applies to all the emission allowances put up for auction, which means that all successful bidders pay the same price per emission allowance.

In 2020, Nova Scotia held two auctions under the cap-and-trade program – one in June and one in December. In both auctions all available emission allowances on offer were sold as follows:

June 2021 auction results

The third auction under Nova Scotia’s cap-and-trade program was held on June 9, 2021. A total of 17 qualified bidders participated in this auction. The results [PDF] of the auction were as follows:

• Settlement Price: $36.71
• Maximum Bid Price: $46.00
• Auction Reserve Price / Minimum Bid Price: $21.09
• Mean Bid Price: $37.34
• Median Bid Price: $31.95
• Median Allowance Price: $36.71

While the June 2021 auction’s Settlement Price of $36.71 represents a significant increase above the Settlement Price for the 2020 auctions (as above, $24.00 and $24.70 respectively), it remains noticeably  below the benchmark compliance price of $40 per tonne of GHG emissions established by the federal Greenhouse Gas Pollution Pricing Act (GGPPA) under its output-based pricing system. Nova Scotia and Québec are currently the only two jurisdictions in Canada with a cap-and-trade based pricing system for GHG emissions, where market forces of supply and demand for government-issued emission allowances serve as the basis for market pricing. The balance of Canadian jurisdictions operate under some form of output-based pricing system or other baseline-and-credit structure for GHG emissions, where pricing is definitionally driven and dictated by the applicable annual benchmark compliance pricing. The June 2021 Nova Scotia auction results appear to reinforce the trends we are observing in Canadian GHG offset market activities to date, where market opportunities and interest appears to be confined to, and defined by the level of discount to, the applicable benchmark compliance price.

It remains to be seen, however, whether the federal government’s announced plan [PDF] to accelerate the increase in the benchmark compliance price under the GGPPA, beginning in 2023 to reach $170 per tonne by 2030, will cause a significant uptick in market prices for emission allowances under Nova Scotia’s cap-and-trade program. As set out in the Nova Scotia cap and trade program’s Regulatory Framework Document [PDF], the penalty imposed on mandatory participants for failing to hold emission allowances equivalent to that mandatory participant’s GHG emissions at the end of the compliance period, is three times the lowest bid price accepted for emission allowances at the most recent auction, multiplied by the amount of outstanding obligations at the time of the determination. Although this penalty is considerably higher than the current GGPPA compliance price and represents the theoretical price ceiling for Nova Scotia emission allowances, as the federal benchmark compliance price increases, it will be interesting to see whether market forces in cap-and-trade jurisdictions create meaningful opportunities for GHG pricing to diverge materially from the GGPPA compliance price threshold.

The next auction under Nova Scotia’s cap-and-trade program is scheduled to be held in November 2021.