When the Auctions Stop Covering Demand

At their four joint auctions in 2024, California and Québec offered 235.5 million allowances. Compliance buyers needed about 224.4 million that year once free allocation and offsets are netted out, on our estimate from public data. The ratio of the two, 1.05, is what we call auction coverage. In 2015 it was 1.47.

Coverage and the bank together place the allowance price between the auction floor and the price ceiling. The bank, the stock of allowances held beyond what their owners already owe, decides how long the market can absorb a shortfall. Coverage decides when the shortfall starts.

Our model of the Western Climate Initiative (WCI) markets puts coverage below 1 from 2028, whether Washington links its market with California and Québec that year or stays separate. From then on the auctions cannot meet buyers’ annual need even if every allowance sells. The price has to rise to whatever level draws allowances out of the bank.

MELCCFP and CARB joint auction results #2 to #48; CARB MRR and compliance reports; MELCCFP emissions and allocation data; Climate Decode calculations and WCI model (October 2026). 2025 coverage is estimated.

• The bank is the stock of allowances held in private accounts beyond the obligations their holders have already incurred. It grows in years when supply exceeds need and shrinks when need exceeds supply. The holdings are published every quarter; the obligations held against them have to be estimated from emissions reports.
• Auction coverage is the number of allowances offered at auction in a year divided by compliance buyers’ net need for that year. Above 1, the auctions alone can meet the year’s need, and the surplus adds to the bank. Below 1, buyers have to find the difference in the bank.

Coverage differs from the bid-to-cover ratio in auction results, which compares the bids at one auction with the allowances it offered. A bid-to-cover above 1 says bidders turned up. Coverage above 1 says the auctions can supply the year’s compliance need.

Above 1, the floor holds the price. The two governments offer more than buyers need and hold back what does not sell. Any premium is a choice by bidders who expect scarcity later. Below 1, someone has to sell out of the bank, and holders sell only at a price that beats keeping the allowance. The larger the bank against the shortfall, the more slowly that price climbs. When the bank is spent, compliance buyers turn to the reserve sales and finally to price-ceiling units at the ceiling.

Supply is the number of allowances offered at the year’s joint auctions, current and advance, including the allowances that utilities and natural gas suppliers consign for sale. Every figure comes from the summary results that the California Air Resources Board (CARB) and Québec’s environment ministry (MELCCFP) publish after each auction.

Need is covered emissions in California and Québec, less the free allocation that recipients keep, less offsets surrendered for compliance. Emissions come from CARB’s mandatory reporting data and from Québec’s published emissions of establishments and fuel distributors. Allocation comes from the two governments’ allocation publications. Offset use follows the share of obligations met with offsets in CARB’s compliance reports, with 2024–2026 estimated from the same pattern.

Exhibit 1 · Auction coverage and the premium over the floor, 2015–2026

MELCCFP and CARB joint auction results #2 to #48; CARB MRR and compliance reports; MELCCFP emissions and allocation data; Climate Decode calculations. 2025 and 2026 coverage are estimates; 2026 has three of four auctions.

From 2015 to 2020 coverage ran between 1.30 and 1.58, and the auctions settled on average within 8% of the floor. When the outlook darkened, auctions went unsold rather than clearing lower. In May 2016, before AB 398 extended the program past 2020, buyers took 11% of the current allowances on offer. In May 2020, at the start of the pandemic, they took 37%.

The premium rose a year before coverage fell, climbing through 2021 from under 1% above the floor in February to 60% in November. Coverage fell to 1.05 in 2022 and stayed near that level through 2024, while the average premium held between 44% and 49%. With little spare supply at auction to bid against, buyers who expected scarcity set the price, which reached $41.76 in February 2024, 74% above the floor.

In 2025 coverage slipped to about 1.02, yet the average premium fell to 8%, and the May auction settled at the floor with 86% of current allowances sold. The program’s life beyond 2030 was settled only when AB 1207 was signed on 19 September 2025. The amendments that set budgets after 2026 took effect on 1 September 2026. In August 2026 the auction settled at $32.48, 16% above the floor, after February’s had settled at it.

Exhibit 2 · Four price regimes by auction coverage and bank size

Climate Decode. The 2028 placement is from Climate Decode’s WCI model (October 2026).

The California–Québec market has sat in the upper left in every year since 2015 on the broad measure of coverage. Our model moves it to the upper right in 2028. How long it stays there depends on the size of the bank against a shortfall that grows as the budgets fall.

CARB’s amendments to the Cap-and-Invest Regulation took effect on 1 September 2026. Three changes reach coverage. Two shrink what the auctions sell, and one lowers buyers’ need.

1. Steeper budgets. California’s budget falls from 254.0 million allowances in 2026 to 225.6 million in 2027, 200.8 million in 2028 and 158.8 million in 2030, about 11% a year. The schedule it replaced fell about 6% a year, to 200.5 million in 2030, so the cuts total 118.3 million over 2027–2030. Utilities and industry receive allocation set by rule, and the auctions take what is left of each budget, so most of the cut comes out of the auctions. Covered emissions in California and Québec fell 2.6% a year between 2015 and 2024.
2. Offsets stop adding supply. AB 1207 requires one allowance to be removed from the next budget for each offset used. Starting with the 2028 budget, CARB sets aside allowances equal to emissions two years earlier times the 6% usage limit. After each compliance period it trues the account up against the offsets actually surrendered. The set-aside comes out of what the auctions would otherwise sell.
3. Free allowances outside the budgets. The Manufacturing Decarbonization Incentive creates 118.3 million current-vintage allowances that manufacturers can apply for, for budget years 2028–2035. They lower the need of the manufacturers who receive them, and none of them is auctioned.

Table 1 · California allowance budgets before and after the 2026 amendments (million allowances)

California Code of Regulations, title 17, §95841 Table 6-2, adopted and replaced columns, as amended effective 1 September 2026.

Québec’s caps continue on their existing schedule, falling about 2.6% a year to 44.14 million in 2030.

Our WCI model carries the same coverage measure forward from the adopted budgets, the allocation rules, the offset set-aside, the incentive pool and a sector-by-sector emissions forecast. It keeps coverage above 1 through 2027 and puts it below 1 from 2028. The result holds for California and Québec alone and for a market linked with Washington from 2028.

Between 2026 and 2028 California’s budget falls 21%, the first offset set-aside comes out of the 2028 budget, and the incentive allowances that do arrive bypass the auctions. Each is a rule already in force. Emissions would have to fall far faster than their 2015–2024 pace to keep the auctions in step.

The crossing year would move if emissions fell faster than our sector forecast, if manufacturers claimed incentive allowances faster than we assume (which lowers need), or if the governments changed how many allowances they offer or hold back from auction.

Climate Decode · Advisory

When does the auction floor stop protecting your compliance cost?

We track auction coverage, the bank and every rule change across the California–Québec and Washington markets.

Sources

• MELCCFP and CARB, summary results reports for joint auctions 2 to 48 (February 2015 to August 2026), including #48 and #47
• CARB, 2026 Annual Auction Reserve Price Notice (1 December 2025); 2026 Allowance Price Containment Reserve notice and Detailed Price Ceiling Sale Requirements
• CARB, Mandatory Greenhouse Gas Reporting data, 2015–2024
• MELCCFP, covered emissions of Québec establishments and fuel distributors, 2015–2024 (Données Québec)
• CARB public allocation summaries; MELCCFP free allocation publications
• CARB, compliance reports for the 2018–2020 and 2021–2023 compliance periods
• California Code of Regulations, title 17, §95801 et seq. (Cap-and-Invest Regulation), as amended effective 1 September 2026: §95841 and Table 6-2, §95871(h), (j) and (k), §95891(g), §95911, §95913, §95915
• California Office of Administrative Law, approval of CARB’s amendments, 31 August 2026
• AB 1207 (Chapter 117, Statutes of 2025), Health and Safety Code §38562
• AB 398 (Chapter 135, Statutes of 2017)
• Québec, Décret 1126-2017 (22 November 2017) under section 46.7 of the Environment Quality Act, annual caps for 2021–2030
• Climate Decode WCI model, October 2026

This article is market analysis provided for information only and is not investment advice.