Author Archives: Erica Morehouse

Western Climate Initiative expands: Ontario to join California-Québec carbon market

Quebec Premier Philippe Couillard, second from left, pictured in 2015 joining the Under2 Coalition, a first-of-its-kind agreement among states and provinces around the world to limit the increase in global average temperature to below 2 degrees Celsius – the warming threshold at which scientists say there will likely be catastrophic climate disruptions. Photo: Jenna Muirhead via Office of Governor Edmund G. Brown Jr.

en español  |  This morning California, Québec, and Ontario signed a linking agreement that officially welcomes Ontario into the Western Climate Initiative (WCI) cap-and-trade market.

The announcement came after an inspiring Climate Week in New York where states, businesses, and individuals showed that despite Washington D.C going backwards, the U.S. will continue to make progress on our commitment to help avert catastrophic climate change. This linkage announcement provides a concrete example of how motivated governments can work together and accomplish more through partnership than they could apart.

Why linkage matters

The agreement will allow participants from all three locations to use carbon “allowances” issued by any of the three governments interchangeably and to hold joint carbon auctions.

This full linkage can have a number of benefits.

  1. The concrete benefits that economists often point to include “liquidity” from a larger market, meaning that if participants need to purchase or want to sell an allowance, it is easier to find a trading partner.
  2. There are also significant administrative benefits to joining an existing market and to working together, including sharing the administration of auctions.
  3. A larger market can also provide access to lower cost reduction opportunities, which lower the overall cost of compliance for the whole market, allowing governments to maintain and strengthen the ambition of their commitments.
  4. The less tangible benefits of having partners that are equally committed to addressing the challenge of climate change can’t be ignored. California may not have a willing climate partner in Washington D.C. but the state is finding the partners it needs in Québec and Ontario and together they can prove that cap and trade provides an effective model for international collaboration and a cost-effective way to keep harmful climate pollution at acceptable levels.

Choosing the right partners

To ensure any carbon market linkage is strong, partners must be carefully selected by evaluating the compatibility of each program. California, Québec, and Ontario started this process early by working together (along with several other states and provinces) in 2009 to develop best practices for establishing cap-and-trade programs.

This carbon club model is one that EDF has identified as a powerful potential driver of climate action

When full linkage is being considered, one of the most important threshold questions is how ambitious each potential partner’s cap is; the cap is the key feature of each program that ensures the environmental goals of each government are met, and a weak cap would impact all participants. Ontario, California and Québec have all cemented into law ambitious and world-leading climate targets for 2020 and 2030. Beyond that, there are some design elements which should be aligned among all programs and others that can differ and outlining these parameters is a negotiation among participants.

Ontario is demonstrating that the WCI carbon market model is an accessible one for ambitious governments to consider joining. This carbon club model is one that EDF has identified as a powerful potential driver of climate action. Hopefully other states and provinces will take Ontario’s lead. Here are some locations to watch:

  • Several Canadian provinces are actively developing cap-and-trade programs that could link with WCI one day.
  • State legislators in Oregon may have a chance to vote during their short session in early 2018 on a “cap and invest” program that is being designed with WCI linkage in mind.
  • Momentum on carbon markets is also growing elsewhere in the Americas. Mexico is in the process of developing its own national emission trading system and has expressed an interest in linking such a system with the California-Québec-Ontario market.
  • And just this past June, in the Cali Declaration, the heads of state of the Pacific Alliance countries of Mexico, Colombia, Chile, and Peru embraced the vision of a voluntary regional carbon market in agreeing to strengthen monitoring, reporting, and verification frameworks for greenhouse gas emissions.

California, Québec and Ontario are creating a model for action that is ripe for others to adopt as is or adapt as needed. This type of bottom-up partnership that matures into real and ambitious collective action is the future of international climate policy.

 

Note: More details on the linkage concepts discussed in this blog can be found in chapter 9 of the EDF co-authored report Emissions Trading in Practice: A Handbook on Design and Implementation.

Posted in California, Canada, Emissions trading & markets, News| Leave a comment

California-Quebec August auction results reflect a secure cap-and-trade future

Photo credit: Flickr – johrling

Strong results from the California-Quebec August auction released today reflect that the future of cap and trade is secure in California.

The August 15 auction saw increased demand and prices for carbon allowances, which will now be usable at least through 2030. These strong results are particularly significant because the auction is the first since a California appellate court cemented the legality of the program, and since the California Legislature extended the state’s cap-and-trade program with the two-thirds vote. This vote protects the program from the type of legal challenges that artificially depressed demand for allowances in 2016.

August auction by the numbers

  • Over $640,000,000: Approximate amount raised for California’s Greenhouse Gas Reduction Fund in this auction.  This is an all-time high for California.
  • $14.75: Price at which current vintage allowances sold. This is $1.18 above the minimum price of $13.57 at which participants were allowed to bid.  This is the largest premium above the minimum price that the auctions have seen since California and Quebec started holding joint auctions. (However, one California auction in 2013 did sell allowances for $14.00 which was more than $3.00 above the minimum price at the time.)
  • 63,887,833: Number of “current vintage” allowances offered and sold at this auction by California, Quebec, and California utilities, and which are available for immediate use.
  • 9,723,500: Number of “future vintage” allowances offered and sold at this auction, which will not be available for use until 2020. These allowances sold for $14.55 a record premium above the “floor price” also $13.57.  The last auction to sell all offered future vintage allowances was in November of 2015.

This is what certainty looks like

Until recently, two big question marks were hanging over California’s cap-and-trade program. These were encouraging auction participants to buy only the allowances that they absolutely needed at the four previous auctions – and led to only modest auction results.

The certainty provided by the resolution of these concerns contributed a great deal to the strong August auction results. Here’s how:

  1. California court upholds cap-and-trade program: A California appellate court first held in May that the cap-and-trade program is not a tax, overturning a lengthy legal battle spearheaded by the California Chamber of Commerce. After this news the May auction saw a significant rebound. This confidence was supported in June when the California Supreme Court declined to review the appellate court’s decision, cementing a win for the state of California (and EDF and NRDC as intervenors) after four and a half years of litigation.
  2. California legislature extends cap-and-trade program to 2030: California’s ambitious 2030 climate target was cemented into law in 2016 but the current cap-and-trade regulation only ran through 2020. ARB was set to extend the program, but legal questions meant that without legislative action the post-2020 program could have been plagued by the same type of challenges that had affected prices in 2016. A change to the definition of a tax in 2010 meant that the California Chamber of Commerce and others might have had gotten a second bite at the litigation apple. But on July 17, 55 Assembly members and 28 Senators came together across party lines to pass legislation extending California’s cap-and-trade program to 2030, ensuring the program could move forward unimpeded.

Today’s results affirm the courage of the votes taken to secure the future of cap and trade in California. Carbon prices now more directly align with expectations about the true cost of reducing carbon pollution through 2030. That clearer and more accurate price will send a signal throughout California that will drive the action needed to meet the state’s climate targets and show others around the world what is possible.

Posted in California| Leave a comment

Making a deal on California’s cap and trade: It’s all about the cap

Inside the California State Capitol building in Sacramento. Photo via Flickr/ kkanouse

California politicians are deep into negotiations over how to extend the backbone of the state’s climate policies, the cap-and-trade program. The Governor’s office and legislative leadership are nearing a compromise that can lock in the 2/3 vote that would provide the strongest legal foundation for a future cap-and-trade program and accelerate the state’s progress to cleaning up the air.

The integrity of the cap is critical, because it is the cap that provides the guarantee that California will meet its climate target.

The comedian Larry David once said “A good compromise is when both parties are dissatisfied.” Elected leaders can probably identify with that sentiment, as they take on the unenviable task of constructing a deal among multiple parties — one that would be a critical step forward for climate action, but might still leave everyone involved at least a little dissatisfied.

As they do, we at EDF will be laser-focused on one question related to cap-and-trade design: Does the deal protect the environmental integrity of the cap?

In the current negotiations, the issue of integrity comes to the fore with one particular aspect of the draft proposal: the design of a "price ceiling" for emission allowances.

It’s all about the cap…

The integrity of the cap is critical, because it is the cap that provides the guarantee that California will meet its target. California has a portfolio of climate policies working together to reduce emissions, and all have their role to play. The signature feature of the cap-and-trade program is that it places a firm limit on carbon pollution and holds the state accountable for achieving the climate targets set in law.

The central importance of the cap in ensuring that the state meets its goals is critical to keep in mind when considering one key aspect of the compromise deal being discussed in the Capitol: a so-called “price ceiling” on the allowances polluters need to comply with their obligations under the cap. While a limit on allowance prices might sound like a good idea, if poorly designed it could come at a significant cost to the integrity of the program — because the only way to keep prices from rising above the ceiling is to allow unlimited emissions.

In other words, a price ceiling is potentially a blank check to polluters that risks busting a hole in the cap. That introduces the risk that California blows past its targets — undermining its claim to climate leadership, and raising the chances of climate catastrophe.

A plan to board up the busted cap

The potential saving grace in the current proposal is that they have a plan for how to board up the hole in California’s climate target if the price ceiling is deployed. The Air Resources Board is required to use revenue raised through compliance at the price ceiling to secure high-quality reductions to make up for any excess above California’s cap. It’s important that this provision be protected, by guaranteeing that all the revenue from a price ceiling is used to reduce emissions, and by imposing a requirement that the emissions debt created by the price ceiling is repaid on at least a ton-for-ton basis.

Now, a far better strategy would be to use or strengthen the tools that have kept cap-and-trade costs down so far, like a reserve of allowances and offsets to avoid getting close to the price ceiling in the first place. But a plan for boarding up the hole is better than nothing at all.

Price ceiling should be a “Break glass in case of emergency” — and only an emergency strategy

The best argument that can be made for a price ceiling is that it can prevent even worse outcomes, such as prices rising high enough to threaten the continued existence of the program. To be clear, such an outcome is highly unlikely — but anyone who lived through the electricity crisis of 2000 knows that we can’t rule anything out.

If a price ceiling is to be included, it must be as a last resort — a kind of “Break Glass In Case of Emergency” strategy. And just like a fire alarm behind a pane of glass, it should really be reserved for genuine emergencies — not simply to let polluters off the hook.

EDF will be laser-focused on one question related to cap-and-trade design: Does the deal protect the environmental integrity of the cap?

It’s also important that the program itself be allowed to function as intended. The beauty of the cap-and-trade program is that it lets the price rise or fall to whatever level is necessary to cut emissions in line with the target. A high price serves as a valuable signal to spur investment in new innovations that can then drive costs down. Set the price ceiling too low, and you cut off that signal — potentially driving prices up in the long run.

All of that means that the price ceiling needs to be high enough that it doesn’t threaten the integrity of the program, or interfere with the ordinary working of the market.

The current proposal wisely provides some very clear and specific direction to the Air Resources Board which will be able to carefully consider and get extensive stakeholder input before setting on a final number. This is not giving carte blanche to an executive agency but rather identifying factors that will dictate an acceptable range and also recognizing the complexity and importance of setting the right price ceiling number.

EDF would much prefer that the signature feature of California’s climate policy, the cap, not be put at risk in the first place. But we are also committed to actively working toward a deal while still fighting for the best possible safeguards for the cap.

Even as we have to contemplate compromises in California it is important to keep our eye on shining optimism that California does represent. The state is debating how not whether to act on climate and for many enduring the sometimes demoralizing swamps of D.C. this is an enviable place to be.

Posted in California| Leave a comment

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
  • Get new posts by email

    We'll deliver new blog posts to your inbox.

    Subscribe via RSS

  • Categories