Author Archives: Erica Morehouse

California carbon auction sells out after auctions upheld by appeals court, allowances sell above the floor

Tower Bridge in Sacramento. Photo: public domain via pixabay.

Auction results from the May California-Quebec carbon auction showed increased demand after a California Court of Appeal upheld the legality of California’s auction design last month.

These auction results should send a clear message to legislators that California has a strong carbon market design that can weather legal challenges and the inevitable bumps of the political process.

They also indicate it’s high time to extend, adapt, and strengthen the cap-and-trade program as the backbone of California’s effort to meet its ambitious 2030 target – something the California legislature has an opportunity to do by June 15 in concert with the governor’s budget.

Results from the May 16 auction

  • The auction offered more than 75 million current vintage allowances (available for 2017 or later compliance) and all of them sold at a price of $13.80, 23 cents above the minimum floor price. This is the first time the auction has cleared above the floor since November of 2015.
  • Allowances held by the utilities, Quebec, and ARB sold with over $500 million expected for California’s Greenhouse Gas Reduction Fund (GGRF).
  • Almost 10 million future allowances were offered that will not be available for use until 2020 or later; a little over 2 million of those allowances sold. This is significantly higher than the 600,000 that sold in February but future allowances tend to have the most variability in demand.

Demand increased significantly from February, but why?

1. The market has clearly reacted positively by increasing demand in the wake of the Court of Appeals ruling. The appeal to the California Supreme Court and uncertainty about cap-and-trade’s future after 2020 may still be impacting market behavior, however.

2. Regulated businesses need a certain number of allowances to cover their emissions. Demand for allowances is in part driven by this simple reality, and since businesses have been laying low the last few auctions, it makes sense they would need to buy allowances this quarter. Economist Chris Busch describes why these “market fundamentals” led him to predict that at least 50-65 million allowances would be sold in this auction.

3. The stabilizing forces built into California’s program prevent big price swings when the market reacts to new developments. We can see this through California’s private secondary market, which shows daily allowance prices, and acts as a kind of barometer for how and whether the market is reacting to particular events. For example, after the California Court of Appeal on April 6 upheld the legality of California’s auction design, prices on the secondary market went up by 54 cents. When the California state senate on May 1 introduced SB 775, which would have overhauled the current cap-and-trade program and eliminated the auction allowances after 2020, the market dipped by roughly 20 cents – but recovered May 10 after the bill did not come up for a vote as anticipated. This means price shifts have been very small – mostly less than one dollar.

What will happen in the auctions if the legislature extends the cap-and-trade program?

An extension of the cap-and-trade program would lead to more robust demand for allowances — leading to a rising allowance price that better reflects the cost of a ton of carbon pollution reductions, taking into account the 2030 target that was put into law last year. With the price likely rising above the floor, we would expect to see future auctions being fully subscribed — translating into significantly more revenue for the GGRF to invest in projects that reduce carbon pollution.

Some observers have painted a dire picture of allowance prices spiking overnight. But that’s not how we’ve seen carbon markets behave in the past — and there’s no reason to think it will happen now. Instead, we’d expect a gradual strengthening of the allowance price over time, as compliance entities weighed the current price of allowances against the anticipated cost of reducing emissions in the future as the cap becomes more ambitious.

What’s more, the system already has a number of design features in place to protect against such a surge in prices, including offsets, the ability to draw on allowances “banked” from previous years, and a reserve pool of allowances (the “allowance price containment reserve”) that would be released into the market if prices rise high enough.

The governor is pushing hard for a deal on cap and trade by the budget deadline of June 15, so I’m hopeful the next auction will give us much to celebrate.

Posted in California, Emissions trading & markets, United States| Leave a comment

California’s cap-and-trade program doesn't need an overhaul

(Source: cropped photo from Flickr/ Zoe-Rochelle)

Today Senator Bob Wieckowski, supported by Senate President Pro Tem Kevin de Leon, proposed what amounts to a complete overhaul of California’s cap-and-trade program after 2020 in amendments to SB 775.

Pro Tem de Leon in particular has been a tireless champion of effective climate policies that are benefiting California’s communities and making the state a global leader on climate action. California would not be where it is today without his leadership especially on investments in disadvantaged communities and strong renewable and energy efficiency targets. This particular proposal, however, contains provisions that risk undermining the enormous progress the state has made.

Rather than scrapping the current system and starting over with an unproven approach, the state should build on success, keeping what is working well while strengthening the program by doing more to address local air pollution and environmental justice.

With President Trump seeking to take the country in reverse, California’s leadership is needed now more than ever. We can – and must – forge a post-2020 program that benefits communities in the state while leveraging progress here at home to spur greater ambition globally.

What’s at risk in this bill?

We still need to do a full assessment on the language of the bill, which was amended today on the Senate floor, but we know certain key policies are at risk:

  • Setting a hard ceiling on allowance prices, without any provision to ensure that California would meet its climate targets if that price ceiling were exceeded, opens a loophole that could undermine the program’s environmental integrity and California’s climate leadership. While the specific price ceiling envisioned in the bill is high enough that it may not be triggered, it represents an approach that is counter to the signature feature of the cap-and-trade program: the guarantee that California will meet its emission target.
  • This price ceiling also supplants a carefully designed cost-containment system that has operated effectively and works in harmony with California’s environmental goals. For example, this bill would prohibit firms from banking allowances, denying them a key source of flexibility that allows them to reduce emissions at the lowest possible cost over time. The bill would also ban the use of offsets, which help California achieve high integrity, hard-to-reach reductions outside the cap while keeping costs under the cap in-check and extending California’s climate diplomacy.
  • This bill could put California’s existing and future partnerships and linkages at risk by overhauling California’s approach to cap-and-trade and then asking partners to quickly fall in line. International linkages strengthen California’s leadership position and allow the state to leverage its program to spur greater ambition globally. Turning inward now would cede global leadership just when the world needs it most.

Today’s proposal is just one step in the complex legislative process, not a final bill proposal. Decision makers must balance many policy priorities as they navigate how to extend California’s cap-and-trade program. We believe there is plenty of room to adapt and strengthen California’s policy package while hewing to the framework that has served California well in reducing carbon pollution so far.

How California can chart a path to a strong cap-and-trade extension

California’s cap-and-trade program is working to bring carbon pollution down while the economy thrives. Even with this success, we recognize California needs to be doing more to address the very serious air pollution issues in local, environmental justice communities. EDF is committing to working on this with legislative leadership and our partners to ensure that the air is safe for all Californians to breathe wherever they live, while recognizing that climate policy – which affects issues as serious as our access to water – is critical to our continued future.

California needs policies that – in addition to improving local air quality – will continue to build on the successful reductions of GHG emissions; secure national and international partnerships vital to the state’s progress as a climate leader; and continue to support strong economic growth.

Rather than a wholesale change of a program that is meeting its goals, we should preserve what’s working and strengthen the parts that aren’t doing enough by designing and implementing policies that will directly improve air quality, especially in environmental justice communities.

This Senate bill comes as Governor Brown is urging the Legislature to pass an extension through the budget process with a two-thirds vote, and after two proposals introduced into the Assembly on how to extend the cap-and-trade program.

It is important that the Senate has now entered this debate and is recognizing the importance of passing a cap-and-trade extension with a supermajority vote. EDF looks forward to working with Senator Wieckowski, President Pro Tem de Leon, Assembly leaders, the Governor, and other stakeholders as California charts a path to a strong post-2020 climate policy.

With the Trump Administration abandoning its leadership role on climate at home and on the international stage, it is more important than ever that California continues to model successful climate policy that ensures that the state will meet its ambitious carbon pollution reduction targets, while promoting better local air quality and supporting a thriving economy.

Posted in California| 1 Response

What to expect from Ontario’s first carbon auction

This post originally appeared on ipolitics.ca.

Air pollution in Toronto. Photo credit: Flickr/ United Nations Photo

On Apr. 3, the Ontario government will announce the results of its first ever auction of pollution permits under its new cap-and-trade program aimed at cutting the emissions that contribute to global warming. As historic and newsworthy as the event may be, it would be wrong to read too much into the results as a measure of the success of the overall environmental program.

Ontario’s cap-and-trade program, launched on Jan. 1, requires emitters such as power plants to surrender a “carbon allowance” for every ton of pollution they produce. The ‘cap’, or limit on emissions, will be reduced over time, ensuring continuing reductions of emissions. The ‘trade’ — allowing emitters to sell excess allowances on the market — provides emitters with a flexible, cost-effective path to going green.

The Ontario government will auction many of these carbon allowances, as they did this month, and the new climate law requires all proceeds to be reinvested in public transit, green technologies and other environmental endeavors that reduce carbon pollution.

The actual auction was held Mar. 22, and offered for sale a total of 28 million allowances at about $17 each. Theoretically, that means the final result announced in April could be hundreds of millions of dollars raised by the province for investments in green projects.

History suggests the actual sum could be considerably less.

Results from recent California and Quebec auctions, which could influence Ontario’s results, have varied widely; those auctions sold 88 per cent and then 18 per cent of available allowances in the two most recent auctions.

There’s a number of reasons why cap-and-trade programs can get off to a relatively slow start.

Relatively soft auction results in the early stages of a cap-and-trade program may simply indicate that the system is working exactly as it was designed.

In the initial stages, for instance, many polluters can find relatively simple ways to cut their emissions enough to meet their cap for the year and thereby avoid having to buy allowances. Or, since they have a few years before they are required to turn in the required allowances, they could simply wait to purchase them.

Many allowances also will be provided to businesses for free — especially those energy-intensive businesses that have competitors in other jurisdictions not subject to similar climate regulations.

Relatively soft auction results in the early stages of a cap-and-trade program may simply indicate that the system is working exactly as it was designed — by allowing industries to make a gradual transition to lower emissions without causing undue economic upheaval or job losses.

Cap-and-trade programs already are showing that economic prosperity and ambitious climate action can go hand in hand. Ontario’s system is modeled after the joint program between Quebec and California, which have both seen carbon pollution decline even as their economies thrived in their first four years of cap-and-trade. In fact, in the first four years of California’s program, emissions under the cap declined while jobs were added faster than the national average — and California’s GDP grew to make the state the fifth largest economy in the world.

The Ontario scheme is designed to achieve similar environmental and economic results by easing consumers, businesses and industries gradually into the new cap-and-trade regime which will put the province on track to a low-carbon economy.

Ontario was able to develop and implement a rigorous but flexible emission-reduction program in less than half the time it took California and Quebec, an example of how climate giants can spur faster and more ambitious action by working together.

A significant feature of Ontario’s plan is that it includes a proposed linkage with Quebec and California’s market. That would mean carbon allowances could be used interchangeably in all three locations, and that Ontario would begin auctioning allowances at the same time as California and Quebec, who held their last auction in February.

Ontario has a rich history of environmental innovation, and its cap-and-trade program is poised to be a key component of its larger climate policy.

As tempting as it may be to judge the Ontario cap-and-trade program by the revenues it will generate, by far the more important measure of success is what it will do for the environment.

Posted in Canada, United States| Leave a comment

California-Quebec carbon market participants appear to wait for future auctions and more information

California cap and trade, renewable energy

California's Alta Wind Energy Center, Image Source: flickr

Carbon auction results released today show low demand for California’s carbon allowances in the first carbon auction of 2017, with only 18% of allowances selling.

The results say more about the many milestones that are ahead for the cap-and-trade program rather than anything about the cap-and-trade program’s core function of reducing overall emissions.

Results from the February 22 auction show:

  • The auction offered more than 65 million current vintage allowances (available for 2016 or later compliance) and sold about 11.6 million. Most of these allowances were utility-held allowances and some were from the province of Quebec. No ARB current allowances sold.
  • Almost 10 million future allowances were offered that will not be available for use until 2020 or later; a little over 600,000 of those allowances sold.
  • This means only about $8 million was raised for the Greenhouse Gas Reduction Fund.

Why cap and trade is working

Auction results themselves cannot tell us whether cap-and-trade is “working.” Though selling most allowances offered at stable prices at or above the minimum or floor price is generally a good sign, the reverse does not necessarily indicate that something went wrong with the cap-and-trade program itself. Disappointing auction result could simply be a product of the market’s expectation that more information on which to make an investment decision and plenty of allowances will be available in the future.

The best indicator is whether greenhouse gas emissions are declining.

The best indicator of whether California’s climate policies, including cap and trade, are working is whether greenhouse gas emissions are declining. As we reported in November’s auction blog, all indications suggest California’s policies are reducing emissions.

Another important factor is whether California’s economy continues to thrive as the state implements some of the most ambitious climate policies in the world. Recent data from the Bureau of Labor Statistics shows that in 2016, California continued to add jobs faster than the national average, as it has in every year that cap and trade has been in place.

So what explains current low demand

Outstanding litigation brought by the California Chamber of Commerce and others challenging California’s cap-and-trade program design is likely still hampering sales of allowances and negatively affecting the auction, as many participants may be waiting to see how the Court of Appeals rules on the legality of carbon market auctions. Oral Arguments were held in late January and a decision is likely by the end of April.

At the same time, Governor Brown in January asked the Legislature to extend the cap and trade program beyond 2020 with a two-thirds vote; the supermajority vote, also recommended by the independent Legislative Analyst’s Office, could insulate the cap-and-trade program from legal challenges like the one brought by the Chamber. Two bills currently in the Assembly – AB 378 (C. Garcia) and AB 151 (Burke) – could both facilitate the extension of cap and trade and be passed with a two-thirds vote. But we are still early in this process and the market is clearly still waiting to see how the Legislation plays out.

What we can understand from California’s February carbon auction

  • Regulated businesses under the cap-and-trade program will have to purchase a large portion of available allowances in order to comply with the cap-and-trade program requirements. It appears they have just decided to deploy the wait-and-see strategy they utilized in May and August, perhaps hoping for more information perhaps in advance of the next auction.
  • One thing that is different between this auction and the May auction that also saw similarly low demand, allowances prices on the secondary market were quite close to the current floor price of $13.57. This means that entities are still valuing carbon allowances close to the floor price, showing expectations of a steady market in the future, there just wasn’t quite enough demand to soak up all the supply in this auction.
  • The November auction when 88% of allowances sold was the last time participants were able to buy allowances for $12.73 at auction instead of the 2017 floor price of $13.57.  This opportunity for lower cost allowances seems to explain the higher demand in November.
  • Importantly, the ARB allowances that went unsold represent a temporary tightening of the cap. They will not be offered again until two auctions have fully sold all available current allowances. This is an important self-regulating design feature of the cap-and-trade program that helps stabilize prices in the face of inevitable market fluctuations in supply and demand.

What to expect from 2017 auctions

Two major developments this spring may provide more certainty about the post-2020 cap-and-trade program, which we’ve noted before could significantly increase auction demand. First, there will likely be a decision from the appeals court on the California Chamber of Commerce case. There could also be more clarity on the bill or package of bills that could move through the Legislature this year.

The core functions of the cap-and-trade program are operating as intended, reducing carbon emissions while the economy thrives.  But it remains to be seen whether the Legislature will be able to act to provide the highest level of certainty for the cap-and-trade market.

Posted in California| Tagged | Leave a comment

Good news in California as carbon auction results improve, and carbon emissions continue falling

Co-authored by Erica Morehouse and Jonathan Camuzeaux.

While we hope President-elect Trump will listen to the almost unanimous global voice of governments and business leaders who all understand that we must act to avert catastrophic climate change, it’s indisputable that leadership from U.S. states will be of paramount importance. Amidst this chaos and uncertainty California and Quebec are now four years into a successful cap-and-trade program with shrinking carbon pollution footprints and thriving economies.

California and Quebec released results today from a much anticipated carbon auction that took place on November 15, and sold a greater number of allowances than in the past two auctions resulting in proceeds for the state Greenhouse Gas Reduction Fund.  This good news comes after California’s 2015 greenhouse gas reporting data earlier this month showed another year of carbon pollution decline for the Golden State.

These year-over-year pollution declines are the most important indicator of success.  But understandably the auction performance and amount raised for climate investment priorities will get a lot of attention in California, Quebec, and Ontario, which is slated to launch its own cap-and-trade program in January with linkage likely to California and Quebec in 2018.

Auction results see increased demand

The November 15 auction offered more than 87 million current vintage allowances (available for 2016 or later compliance) and sold almost 77 million. Approximately 10 million future allowances were offered that will not be available for use until 2019 or later; over one million of those allowances were sold.

These auction results represent a significant increase in demand from the August auction which offered a similar number and sold about 31 million allowances, up from a little over eight million allowances sold at the May auction, the first auction to experience very low demand for allowances.  The May and August auctions raised almost no revenue for the California Greenhouse Gas Reduction Fund (GGRF).  While final numbers won’t come in for another few weeks, based on the allowances sold, this auction likely raised over $360 million for the California GGRF. 

Impacts on demand for this auction

A number of factors, good and otherwise, contributed to this quarter’s results.

  1. One of the most immediate factors that likely contributed to increased demand in this auction is the knowledge that the minimum sale price or “floor price” will rise to about $13.50 in 2017. This is the last auction that participants will be able to purchase allowances for $12.73 before the annual increase.
  1. A constant during this and previous auctions is litigation brought by the California Chamber of Commerce and others challenging California’s cap-and-trade program design. The case was brought the day before California’s very first auction in 2012 and California won at the trial court level. The plaintiffs appealed, and the Court of Appeals will hear oral arguments on January 24, 2017. This outstanding litigation may be leading some potential auction participants to take a wait-and-see approach.
  1. This wait-and-see approach is only possible if regulated businesses in California already have enough allowances to cover their 2016 obligations. California just released preliminary data for 2015 which shows emissions were about 14 percent below the cap. This suggests a successful set of climate policies that are incentivizing polluters to lower levels of pollution below required levels if they are able.  Some have referred to this as an oversupply of allowances, but it’s perhaps more accurate to refer to it as over-compliance.  Businesses have a choice of how to respond when they over-comply: avoid buying allowances in a future auction or buy allowances when they are presumably cheaper and bank them for future use.

A big question is how much the passage of SB 32 in August has impacted auction demand.  Governor Brown had previously established a target of reducing carbon pollution 40 percent below 1990 levels by 2030 through an executive order, but SB 32 cemented this requirement into law making it much more certain.  Setting a 2030 target could increase demand for allowances, but the market will not necessarily get certainty about that target or how California will meet it in one fell swoop.  While SB 32 set the 2030 target, like AB 32 it was silent on policy tools to meet that target so decisions about cap-and-trade post-2020 are still outstanding.

Greenhouse gas emissions decline again in 2015

California’s Mandatory Greenhouse Gas Reporting program requires that state’s largest polluters to report their emissions annually. The California Air Resources Board released the final tally of 2015 greenhouse gas emissions on November 4th, which showed yet another year of carbon pollution decrease.

In 2015, California’s emissions covered under the cap-and-trade program decreased by roughly one percent compared to the year before. California is on track to meet its target of reducing pollution to 1990 levels by 2020.  Carbon pollution for capped and uncapped sources was down in 2015.

Meanwhile, data from the Bureau of Economic Analysis shows the state’s gross domestic product increased by almost six percent in 2015 – while California also experienced an increase of total employment of a little over two percent in 2015 – proving again that economic output and emissions don’t necessarily go hand in hand.

With these results California is on solid footing to continue as a beacon of hope for climate action in the United States and perhaps even to attract new partners inside or outside the country who are ready to join a successful program.

 

Posted in California| Tagged | Leave a comment

California’s ambitious new climate commitments follow 10 years of success

Photo credit: Joseph Thornton | Flickr.com

California made history a decade ago this month by being first in the nation to pass legislation (AB 32) putting an absolute limit on carbon pollution through 2020.

The California Legislature made history again last week by extending and strengthening those limits to 2030 (SB 32 and AB 197). SB 32 requires California to reduce pollution 40% below 1990 levels by 2030 – as ambitious as Europe’s climate policies – and provides the flexibility to use a variety of tools to accomplish this goal. The governor has announced he will sign both bills.

Legislators also passed a spending plan yesterday that will direct approximately $900 million in cap-and-trade proceeds to reduce pollution and benefit California communities, especially the most disadvantaged.  Another bill passed yesterday, AB 1550, increases the commitments of those disadvantaged communities and makes low-income communities beneficiaries as well.

California’s decision to set these new targets and establish this new spending plan was not just based on hope and necessity, but on a 10-year foundation of success and a solid understanding that this next set of targets are ambitious but achievable.

Here’s why California’s climate program has been a success, and why the new long-term emissions reduction target will help the state continue to thrive.

California’s carbon pollution is declining.

AB 32 requires California reduce its greenhouse gas emissions to 1990 levels by 2020, a reduction estimated at about 15% below where emissions would have been without regulation.  To meet these reductions, California has adopted a suite of climate policies anchored by a cap-and-trade program, which puts an absolute limit on carbon pollution, while providing cost-effective options for businesses to meet their reduction obligations.

California’s carbon pollution has steadily declined in the last 10 years. In the first two years that the cap-and-trade system was in place (2013 and 2014), California’s carbon emissions declined by an amount equivalent to taking over 1 million passenger vehicles off the road for a year.

California is ahead of schedule in meeting its 2020 goal. Emissions have been below required levels in every year we have data for. Regulators expect that in 2020 California will exceed its own requirements by an amount that is equivalent to taking 3.3 coal burning power plants off-line for one year.

California’s economy is growing.

Historically economic growth has been accompanied by a corresponding increase in emissions, but California is charting a different course. The state’s Gross State Product has increased steadily since the recession as emissions have continued to fall, as shown in this figure:

In the first two and a half years of California’s groundbreaking carbon market, the state added over 900,000 jobs, a growth rate that eclipsed the national rate.

Carbon markets are going global.

The impressive outcomes from the first decade of California’s AB 32 implementation have attracted numerous partners. States, provinces, cities and countries are taking note and action.

At the Paris negotiations at the end of 2015, California Governor Jerry Brown showcased a “Memorandum of Understanding,” bringing together states and regions committing to reducing greenhouse gas emissions to at least 80% below 1990 levels by 2050, or to less than 2 metric tons per capita by 2050. Over 100 states, provinces, and cities, representing one quarter of the world economy, signed on the agreement.

In addition, California is partnering directly with several Canadian provinces to implement joint cap-and-trade programs. It has also established an agreement to share information and work with China and Mexico on their carbon pricing efforts.

2030 target is ambitious but achievable.

Estimates suggest that after on-the-books polices are implemented, California will still have to find a way to reduce pollution another 17-29 percent to meet the 2030 target. The Air Resources Board has proposed relying on a ratcheting up of existing polices and a reliance on the existing cap-and-trade program to ensure the 2030 target is met.  Research from the Lawrence Berkeley National Laboratories shows that meeting the 2030 target is possible with a ratcheting up of existing polices

The world will be watching whether California can repeat its gold medal performance under these new targets, and all indicators seem to point in the state’s favor.

Posted in California, Emissions trading & markets| Leave a comment
  • Get blog posts by email

    Subscribe via RSS

  • Categories