Yosemite National Park
The latest California-Quebec auction was fully subscribed, based on results released today. This is the second quarter in a row where all allowances sold, which is good news for the state’s Greenhouse Gas Reduction Fund. There is still opportunity, however, for more ambition in the program moving forward.
Today’s results, by the numbers
- All 54,773,607 current vintage allowances were offered for sale. This is the second consecutive auction where all current allowances sold. It should also be noted that there were just under 2 million more allowances offered in November compared to February, mainly due to the annual decline of the emissions cap.
- Current vintage allowances cleared at $17.80, 9 cents above the floor price of $17.71. This is 87 cents above the November 2020 settlement price of $16.93.
- All of the 8,306,250 future vintage allowances offered for sale sold, just as 100% sold in the previous auction. These allowances may not be used for compliance until 2024.
- Future vintage allowances sold at $18.01, 30 cents above the floor price of $17.71, and 66 cents above the $17.35 settlement price from November 2020.
- California raised almost $650 million for the Greenhouse Gas Reduction Fund, some of which the Legislature may allocate during the ongoing budget process for priorities such as the Community Air Protection Program and the Safe and Affordable Drinking Water Program.
- Quebec raised just over $150 million (just over $190 million CAD) to invest in their own climate priorities.
Today’s results could reflect growing certainty about California’s economic recovery from COVID-19, and wide expectations that emissions will increase in the coming year as companies and families return to pre-pandemic activities.
Because this is the second auction in a row to sell out of allowances, previously-unsold allowances such as those from the May and August 2020 auctions, can begin to be offered for sale again at the May 2021 auction. When allowances go unsold at auction, they are withheld from sale until two consecutive auctions sellout, after which they are slowly added back to the volume of allowances offered at subsequent auctions.
However, even as we are all anxious to return to some version of “normal” life, our climate can’t afford to return to normal. California must simultaneously support economic recovery, create family-sustaining jobs, and keep emissions declining. The state slashed emissions and grew the economy after the 2008 recession, and can do so again. A key part of this is creating more ambition in the cap-and-trade program as part of the forthcoming Scoping Plan update.
Ch-ch-changes
This first auction of 2021 is notable because it is the first sale reflecting program design changes legislated in AB 398, the extension of the cap-and-trade program from 2017. This is not an exhaustive list of the post-2020 design changes, but some of these updates point to the ability and need for more stringency in the cap-and-trade program.
- Price ceiling: Before this year, there was no maximum price at which an allowance could be sold. But because of concerns by legislators about the cost of compliance for companies, AB 398 directed CARB to add a ceiling price, above which no allowances would be sold at auction. In 2021, the price ceiling is $65 per ton, increasing 5% annually plus the rate of inflation. This is the same rate at which the price floor increases. From an environmental perspective, a price ceiling can be problematic because if prices were to reach that level, CARB could issue as many allowances as needed to cover compliance obligations. This would undermine the integrity of the emissions cap because it would allow emissions to exceed the cap. However, AB 398 also required that any revenue raised from the sale of allowances at the price ceiling would be used to purchase emissions on at least a ton-for-ton bases. This ensures that the cap stays intact.
- Direct allocation: When cap-and-trade was first developed in California, some industrial sectors were directly allocated a portion of their needed allowances to prevent emissions and economic leakage (pollution and jobs simply leaving California), and to support them in the transition to complying with a new program. At a high level, there is an “assistance factor” that previously declined over time multiplied by the rate at which the overall emission cap declines. But as with the desire for a price ceiling, there was some concern about the cost of compliance with the cap-and-trade program. As such, AB 398 directed CARB to eliminate the decline in assistance factor, and that allocation would no longer be based on risk of leakage. The result is that many companies receive more allowances directly, rather than purchasing them at auction, than they would have otherwise. However, industry still does not receive all of the allowances they need, and therefore must still reduce emissions or purchase allowances at auction. Moreover, the requirement to hold an allowance – even if a certain percentage is given freely – creates an incentive for abatement at the source, if it can be done so at a lower cost than the value of the allowance. The direct allocation still declines annually in line with the overall cap decline, increasing the incentive for direct reductions each year.
- Offset limitations: Before 2021, companies could use offsets to meet up to 8% of their compliance obligation. Out of a desire to ensure even more emission reductions occur onsite, and for offset usage to provide more direct benefit to Californians, AB 398 changed the usage limit and added new requirements. Specifically, from 2021 to 2025 companies can only use offsets to meet 4% of their compliance obligation. This increases to 6% starting in 2026. Additionally, half of all offsets used must provide a “direct environmental benefit” to California. While greenhouse gases reduced in California or elsewhere have the same impact on the climate, the same is not true for criteria pollutants or toxic air contaminants and impacts on local health.
Looking forward to the Scoping Plan update
These newly-implemented features of the cap-and-trade program point to both an ability and need for more stringency in the program. The program is designed with numerous cost-containment mechanisms built into the program – including beyond what is discussed here – that protect against dramatic price spikes. At the same time, the climate crisis is accelerating and there is a need for California to secure even greater reductions during this upcoming decade, to ensure greater reductions from the transportation sector specifically, and to ensure that our recovery is coupled with keeping emissions declining.
California should tighten its emissions cap by issuing fewer allowances in future years to increase the ambition of the program and ensure that the state is achieving as many emission reductions in the coming decade as possible. And these next ten years are absolutely critical to ensure a decline in cumulative climate pollution – the measure that is most important in terms of climate impact. This will be EDF’s top priority in the forthcoming Scoping Plan update.