Businesses Invest Early to Comply with California’s Carbon Market

California Air Resources Board drives pollution reduction projects

California’s recently approved cap-and-trade regulation—which doesn’t take effect until 2013—is already driving investments in pollution reduction projects. 

In late August, Shell Oil became the first company to buy allowances for the program by purchasing contracts for 100,000 tons of California Carbon Allowances for delivery in 2013.  In late September, Constellation Energy, announced it was going to replace coal with biomass at its coal-fired power plant  – a move similar to what has been happening at California’s remaining coal plants in recent years. 

The California Air Resources Board (CARB) first proposed the text of its cap-and-trade in October 2010 and adopted the final regulation last week. The rule will require between 18 and 27 million metric tons of pollution reductions in 2020 from about 600 different facilities in California. It complements existing pollution reduction programs, including those requiring increasing amounts of clean energy.  CARB’s regulation requires polluters to surrender an allowance for every ton of greenhouse gas (GHG) they emit, with the total number of available allowances declining every year.

In advance of the rule taking effect in January 2013, Shell’s historic trade and Constellation’s recent announcement shows that businesses are making investments that allow them to comply with the program.

Shell has signed contracts for delivery of allowances at a future date (known as derivatives) at $17 per ton. Derivative trading is already happening on two carbon exchanges – the International Carbon Exchange and the Green Exchange.  And, as Shell’s purchase and reserve trading prices show, investors and businesses are getting an early look at the likely price range of allowances ($17 to $22.25) and planning accordingly.

Constellation Energy, on the other hand, will make on-site reductions to directly reduce pollution.  Another utility, Stockton Cogen, has already begun transforming its operations from burning coal to burning biomass for power generation.

Early allowances trading and documented emission reductions projects provide CARB with valuable information that it can use over the next year as it works towards implementing the program. 

CARB is now developing a market tracking system that will allow it to monitor trading activity, and other elements of the market.  With information at its fingertips, CARB can ensure that California has a robust cap-and-trade system that reduces pollution cost effectively and in a transparent and accountable manner.

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