EDF Talks Global Climate

Why it matters that California hit its 2020 emissions target four years early

sacramento california cityscape skyline on sunny day, water, wetland

Sacramento, Calif. cityscape. Photo credit: digidreamgrafix

This post was authored by Jonathan Camuzeaux and Maureen Lackner

California hit its 2020 greenhouse gas (GHG) emissions reduction target four years ahead of schedule, according to 2016 emissions data released yesterday by the state. At this rate, the state is well-positioned to formally meet its 2020 target assuming it keeps up the good work.

While the world’s emissions are once again on the rise and the Trump Administration is pulling the U.S. backward on climate progress at the federal level, states and regions continue pushing ahead, and California is at the front of the pack. California’s monumental achievement is worth celebrating – and it’s worth investigating how the state got here, and the challenges and opportunities ahead.

Latest emissions data

Here are some highlights from the annual California Greenhouse Gas Emission Inventory published yesterday:

  • California’s 2016 emissions fell to 429 MMt CO2e, beating the 2020 target of 431 MMt CO2e, the statewide greenhouse gas emissions level in 1990.
  • This was the fourth year in a row of emissions reductions in California, where emissions dropped by 3% (12 MMt CO2e) between 2015 and 2016. Emissions fell 13% (64 MMt CO2e in 2016) compared against 2004, when emissions in the state peaked.
  • Business is booming as emissions are falling. In the last year, California’s GDP grew 3% while the carbon intensity of the economy dropped 6%. From January 2013 to December 2016, California added over 1.3 million jobs, an 8% increase, outpacing U.S-wide job growth of 6% in the same period.

The report is an annual update of statewide GHG emissions based on state, regional, and federal data sources, as well as facility-specific information from California’s Mandatory GHG Reporting Program (MRR). The GHG Inventory includes both emissions covered by cap and trade and the remaining 20% of emissions outside the program. Although the GHG Inventory report does not distinguish between emissions within and outside cap and trade, the latest MRR report shows that both categories of emissions fell in 2016, suggesting that California’s multi-pronged approach to emissions reductions is working.

The earlier, the better

Global warming is caused by the cumulative emissions that are present in the atmosphere. Carbon dioxide can stay in the atmosphere for more than a century, so earlier emissions reductions mean there are fewer years for those tons of carbon to have a warming impact on our climate. So beating the 2020 target is important for the atmosphere, but also gets us off to a good start to meet the even more ambitious 2030 target.

Where California’s reductions are coming from

The electric power sector is responsible for about 16% of the state’s 2016 emissions, and accounts for over 85% of gross reductions. Relative to 2015, total sector emissions fell 18%, while emissions from in-state power generation fell 15% and imported electric power emissions dropped 22%. CARB analysis attributes these reductions to growth in utility-scale renewables, as well as rooftop solar generation.

Hydropower also generated larger amounts of electricity than usual due to heavy rainfall in 2016. Small reductions came from industry (a 2% sector-wide drop) and agriculture (1% sector-wide).
Although not enough to fully counteract power sector decreases, some sectors’ emissions increased in 2016. California’s 2016 transportation emissions—the largest source of GHGs in the state—increased by about 2%, continuing the sector’s trend of slowly rising emissions since 2014. Emissions from commercial and residential activities grew by 4%, but account for less than a tenth of total state emissions.

Looking ahead

Given current emissions reductions, the state can start to look forward to its more ambitious 2030 target of getting emissions 40% below 1990 levels. The state’s 2017 “Scoping Plan,” which EDF supported, lays out a comprehensive plan for how to approach this target. All the signs are positive right now and if additional measures are needed to meet state requirements for 2030, there is still plenty of time to pursue those.

California is clearly demonstrating that smart, market-based policy helps us meet targets faster and more cheaply than originally envisioned. California is growing its GDP and adding jobs faster than the national average, and cutting carbon even faster than we expected. This creates a strong foundation for the even more dramatic transition California needs to reach its next goal in 2030.
In the coming decades, the world must get on track for deep emissions reductions and a dramatic transformation to a cleaner economy. California is helping to blaze the trail to that future by demonstrating once again that meeting ambitious climate targets is possible while maintaining a thriving economy.

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Second California-Quebec-Ontario carbon auction sells out, showing market’s strength

 

https://www.pexels.com/photo/golden-gate-bridge-san-francisco-61111/

San Francisco Golden Gate Bridge. Photo by Juan Salamanca. 

The second California-Quebec-Ontario joint greenhouse gas allowance auction has sold all current allowances, just like the inaugural tripartite auction in February 2018. There was again strong demand for future allowances, all indicating that despite political and regulatory uncertainty from a key partner, Ontario, the market is on solid ground.

May auction at-a-glance:

  • All 90,587,738 current and previously-unsold allowances sold, clearing at $14.65, which is 12 cents above the $14.53 price floor. This is slightly higher than the February settlement price.
  • 6,057,000 of the 12,427,950 future vintage allowances offered sold at the floor price. This is 2,519,000 million less than sold at the February auction. The decrease is likely due to ongoing uncertainty in Ontario, but as these allowances are not available for use until 2021, it is still an indicator of confidence in the Western Climate Initiative market down the road.
  • An estimated $681,051,270 was raised for California’s Greenhouse Gas Reduction Fund to continue funding climate and equity priorities like urban greening, electric vehicle infrastructure, and affordable housing near public transit.
  • Ontario raised approximately $369,271,300 USD for funding public transit, electric vehicle incentives and energy efficiency upgrades.
  • Quebec raised approximately $151,353,660 USD to support the province’s transition to a green economy.

These results are encouraging because they show that despite ongoing political uncertainty in Ontario, the market is strong and stable. They also show the benefits of linkage to a larger market are real. All three linked jurisdictions have access to more trading partners through the Western Climate Initiative, which creates opportunities for even greater climate ambition. This kind of international cooperation shows that jurisdictions can have an outsized influence on global climate action, particularly at a time when federal leadership from the United States on climate is lacking.

Previously unsold allowances
The role of previously unsold allowances could also be impacting today’s auction results in two ways.

First, this is the third auction where held, or previously unsold allowances were offered for sale. These allowances increase the number of available allowances in the auction, which may contribute to keeping the price near the floor. This demonstrates the importance of that price floor. It is a central feature of the program that ensures stability of the market and the revenues.

Second, back in July 2017 the California Air Resources Board (CARB) adopted the so-called “24 Month Rule.” This establishes that any state-owned allowances that remain unsold for 24 months are either moved to the Allowance Price Containment Reserve (APCR) or retired. This has the effect of tightening the cap either temporarily (if prices were to unexpectedly jump) or permanently. The first significant retirement of allowances could happen after the August auction, so companies could be buying now in anticipation of decreased supply later.

Looking Forward
CARB is in the process of drafting a regulatory update for the cap-and-trade program post-2020. The program has been successful at reducing emissions, as demonstrated by current emissions being below the cap, even as California has grown to the fifth largest economy in the world. This emissions trend provides an important opportunity for California to continue driving increased ambition by setting a tighter post-2020 emissions cap, and continue showing that ambitious climate action can go hand-in-hand with strong economic growth.

Of course the biggest question in the linked carbon market right now is Ontario, which is having elections in June. Although two of the leading parties want to preserve the program, one party wants to end it, but would need to overcome a mountain of legal hurdles. The outcome of the June election could set up either increased confidence in the future of cap-and-trade in Ontario or lingering questions. But the results for both current and future vintage in this auction indicate that confidence is steady, and the California-Quebec-Ontario market remains a world leader in driving climate action.

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Ontario Joins California and Quebec for Largest Carbon Auction Yet: All Current Allowances Sell

Toronto, Ontario skyline. Photo by Nextvoyage from Pexels https://www.pexels.com/photo/architecture-buildings-canada-city-457937/

The results of the first California-Quebec-Ontario joint auction of greenhouse gas allowances were released today, and even with a record-high volume of allowances for sale, the current auction sold out with the price clearing just above the floor. This is an indication of the strength and stability of the expanded market.

Even more significantly, this was Ontario’s inaugural Western Climate Initiative (WCI) auction, and it is a real-world demonstration of the benefits of linking cap-and-trade programs. Ontario’s participation in the WCI brings more trading partners to the table, helps keep compliance costs low, creates an opportunity to increase ambition to reduce emissions, and models what international climate action can look like.

First, let’s do the February numbers:

  • All 98,215,920 current allowances offered were sold, including 23,743,316 allowances from Ontario, and 14,894,520 previously unsold allowances. This is the first auction including allowances from Ontario, and the second offering of held allowances.
  • Allowances cleared at $14.61, this is 8 cents above the floor price of $14.53. This is down from the $1.49 above the floor price in the November, 2017 auction. However, this is not surprising given the significant increase in allowances for sale, and the floor price itself has increased 96 cents since November.
  • 8,576,000 future vintage allowances sold of the 12,427,950 allowances offered. These allowances will not be available for compliance until 2021, demonstrating there is confidence in the growing WCI market into the future.
  • Approximately $725 million was raised for California’s Greenhouse Gas Reduction Fund. This revenue will be invested in improving local air quality, building sustainable and affordable housing near transit, and helping low-income families weatherize their homes.
  • Ontario raised an estimated $377 million USD and Quebec an estimated $155 million USD to fund their own climate investments.

So what does it all mean?

By selling out of allowances, the market quelled concerns that supply would outstrip demand due to the unprecedented number of allowances for sale. These results show that the market is stable, and with the addition of new trading partners from Ontario, the demand for allowances is healthy.

This greater availability of allowances does contribute to the price clearing just above the floor, but rather than something to be concerned about, this demonstrates the importance of that price floor. It is a key feature to keep the market and the revenues on an even keel.

Another feature of the linked cap-and-trade program is the ability to bank allowances. It is possible that allowance prices will rise after 2020, and companies are planning ahead. Some may be buying the limited number of allowances they are allowed to save now, when they are less expensive, supporting the strong demand we saw in the February auction.

Every allowance that is banked represents one ton of carbon emissions that are not released into the atmosphere now. Greater emission reductions sooner mean less cumulative emissions, and that is a win for the environment. Lower emissions now also creates an opportunity for California to consider tightening the cap in the coming years. This would drive even deeper emission reductions as the state looks to the ambitious 2030 target.

For Ontario, these results also demonstrate some of the benefits of participating in a larger carbon market. Ontario’s last solo auction did not clear, perhaps because of partisan campaign promises to abandon cap and trade and leave the Western Climate Initiative. Even with demand potentially dampened in Ontario due to this uncertainty, all of Ontario’s allowances sold to buyers in the larger market. This provides proceeds that can fund Ontario’s transition to a clean economy. We can’t know what would have happened in an Ontario-only auction, but this seems a clear example of the stability that joining a larger market can generate.

We often talk about California and Quebec setting an example on climate action in the face of the Trump Administration determination to go backwards. Today’s results demonstrate that the Western Climate Initiative has gained a valuable new partner in Ontario, and that this partnership is succeeding.

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California Adopts Climate Game Plan for 2030

Cap and trade is like the goalie – it’s there keeping California’s emissions in check even if it’s the state’s other policies that are scoring most of the goals. Photo: Wikimedia

By Katelyn Roedner Sutter and Erica Morehouse

Today the California Air Resources Board (CARB) adopted the 2017 Climate Change Scoping Plan, the strategy for achieving California’s 2030 greenhouse gas emissions target. Developing and updating this Scoping Plan is a process pioneered by California that provides a game plan of how the state intends to meet its climate goals with an increased focus on air quality.

The cap-and-trade program continues to be a centerpiece of the current Scoping Plan because it allows the state to put a firm limit on overall carbon emissions. This is essential as the state charts a path to an ambitious 2030 target. The Scoping Plan lays out the blueprint for California’s overall climate policies. Cap-and-trade design details will be further developed in future ARB rulemakings; EDF will be deeply engaged on details like setting a high enough price ceiling and setting the level of the cap with a focus, as always, on environmental integrity.

Cap and trade is a team sport in California: focusing on who makes the goals is missing the point

The role of cap and trade is an important one: assuring that California doesn’t exceed the emissions limit it has adopted into law. California has a variety of policies in place to meet its climate targets, which means there are multiple programs acting to lower the same emissions. But cap and trade is the policy that will ensure California reaches its climate target by setting a firm limit. If other policies do not do as much as anticipated to reduce emissions, cap and trade will make up the difference. The flip side is that if other policies are driving down emissions faster than expected, cap and trade may need to do less of the work to reduce emissions.

I’m a hockey fan, so here is one way to think about it. A goalie on a hockey team isn’t failing when they aren’t the one who scores the winning goal. They are succeeding when they are preventing the other team from scoring. Cap and trade is like that goalie – it’s there keeping California’s emissions in check even if it’s the state’s other policies that are scoring most of the goals. But cap and trade is also a versatile athlete, it can play the forward position when needed. California has designed its climate policies as a team sport, though, and whatever position cap and trade plays, it’s a critical member of the team as today’s Scoping Plan recognizes.

Beating reduction goals is a good thing and an opportunity

California’s emissions are declining and the state is on track to beat its 2020 goal. There’s discussion about the implications of having emissions significantly below the cap, but rather than being a concern, we see this as a sure sign of success. More emission reductions earlier in the program is good news for the environment. It’s also an opportunity for California to consider cutting emissions even more by trimming the overall number of allowances it makes available in the coming years as the state looks to the ambitious 2030 target.

Today’s adoption of the 2017 Scoping Plan helps ensure the ongoing success of California’s team of climate strategies, with cap and trade as the check on carbon pollution. Together, California’s suite of climate and air policies can keep driving down global warming pollution while improving the health and environment across the Golden state.

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The New Normal: California-Quebec Auction Clears Above the Floor Price

Photo: Pxhere

By Erica Morehouse and Katelyn Roedner Sutter

California and Quebec released results today for the November 2017 auction which showed steady prices well above the floor for the second auction in a row. The November auction was also the second in a row to sell out of allowances. Both outcomes are a reflection of the secure market that is now set to run through 2030, and demonstrate that the design features of cap and trade are working as expected to maintain a strong and stable program.

November Auction At-a-Glance

  • Approximately $862,407,989 raised for the Greenhouse Gas Reduction Fund to invest in a number of programs including clean transportation, urban greening, and improving local air quality.
  • All current vintage allowances were sold of the 79,548,286 offered for sale, including 15,909,657 allowances that were previously unsold in 2016. This is the first auction including held allowances.
  • Current vintage allowances sold at $15.06, $1.49 above the $13.57 floor price. This is 31 cents higher than the August clearing price.
  • All future vintage allowances sold of the 9,723,500 offered for sale. These allowances will not be available for compliance use until 2020. For the second auction in a row, future vintage allowances sold out above the floor price, showing strong confidence in the cap-and-trade program after 2020.

The Nuts and Bolts of Cap and Trade, Important and Working

This auction demonstrated how some of the “behind the scenes” elements of cap and trade are working – and succeeding – to keep the market strong and stable.

Importance of Banking

These auction results show that businesses’ ability to “bank” allowances for use in later years when prices will be higher and the cap tighter are critical for market stability, and most importantly, emissions performance. In 2016 and early 2017, before California legislatively extended its cap-and-trade program from 2020 to 2030, demand for allowances was falling off in part because emissions were already below the cap and the uncertainty of the future program discouraged any banking. With the cap extended to 2030, however, demand and prices are more stable and there is once again a strong incentive for polluters to save their allowances for future years and make cost-effective emission reductions sooner than required for compliance. Early reductions can be cost effective for companies, and are great for the environment.

First Auction to Offer Unsold Allowances

The November auction is the first to offer previously unsold allowances, in this case allowances held over from the 2016 auctions. Last year, when demand for allowances was lower, these unsold allowances were held to be re-offered at later auctions. This adjusted supply downward when needed and adds extra supply when allowances prices start to rise (as they are doing now), creating price stability in the market. These 15 million extra allowances now mean there was enough supply to meet demand.

California Emissions Continue to Decline

Further good news from November, as EDF reported yesterday, is that the California Air Resources Board released their 2016 emissions report and found that emissions covered by cap and trade have not only continued to decline, but are doing so at a faster pace than in previous years.

  • Emissions are a whopping 58 million metric tons below the cap for 2016, an amount equivalent to taking over 14 coal fired power plants off-line for a year. Even if some of these “saved” pollutants are emitted later, this is a win for the atmosphere since there will be several years where they will not be contributing to atmospheric warming.
  • The bulk of these reductions came from the electricity sector, which reduced emissions by increasing renewable production and hydroelectricity and decreasing imports from coal-generated electricity.
  • Transportation emissions did increase in California as they did in the rest of the world. However, the state has a number of policies that are targeted at reducing those emissions and cap and trade is keeping overall emissions in check so they have time to work.

Today’s auction results show one more data point in the example California and Quebec are setting for the world in how to implement effective climate policies. This example was on display at the recent UN Conference of Parties (COP23) in Bonn, Germany that wrapped up last week. Governor Brown as well as three other U.S. Governors and many mayors were in attendance making sure the world knew Donald Trump cannot prevent U.S. states and cities from acting to reduce emissions and protect their residents.

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California Bucks Global Trend with another Year of GHG Reductions

A parabolic trough solar thermal electric power plant located at Kramer Junction in California | Photo: Wikimedia

By Jonathan Camuzeaux and Maureen Lackner

The California Air Resources Board’s November 6 release of 2016 greenhouse gas (GHG) emissions data from the state’s largest electricity generators and importers, fuel suppliers, and industrial facilities shows that emissions have decreased even more than anticipated. California’s emissions trends are showing what is possible with strong climate policies in place and provide hope even as new analysis projects that global emissions will increase by 2% in 2017 after a three-year plateau.

California’s emissions kept falling in 2016

The 2016 emissions report, an annual requirement under California’s regulation for the Mandatory Reporting of Greenhouse Gas Emissions (MRR), shows that emissions covered by the state’s cap-and-trade program are shrinking, and doing so at a faster pace than in prior years. Covered emissions have dropped each year that cap and trade has been in place, amounting to 31 million metric tons of carbon dioxide-equivalent (MMt CO2e) over the whole period, or 8.8% reduction relative to 2012. The drop between 2015 and 2016 accounts for over half of these cumulative reductions (16 MMt CO2e; 4.8% reduction relative to 2015). The electricity sector is responsible for the bulk of this drop: electricity importers reduced emissions about 10 MMt CO2e while in-state electricity generation facilities reduced emissions by about 7 MMt CO2e.

Some sectors’ emissions grew in 2016. Just as with global transportation emissions, California’s transportation emissions have steadily crept up in recent years, and the MRR report suggests this trend is continuing. Transportation fuel suppliers, which account for the largest share of total emissions, reported a 1.8 MMt CO2e increase in emissions covered by cap and trade since 2015. Cement plants and hydrogen plants also experienced small increases in covered emissions. One of the benefits of cap and trade, however, is that if the clean transition is occurring more slowly in one sector, other sectors will be required to reduce further to keep emissions below the cap while the whole economy catches up.

Emissions that are not covered by the cap-and-trade program dropped, from 92 MMt CO2e in 2015 to 87 MMt CO2e in 2016. While small, this represents the largest reduction in non-covered emissions since 2012 and is mostly driven by suppliers of natural gas/NGL/LPG and electricity importers. Net non-covered and covered emissions reductions resulted in a 20.5 MMt CO2e drop in total emissions from these sectors. 

These results are a welcome reminder that the cap-and-trade program is working in concert with other policies to accomplish the primary objective of reducing emissions.

The California climate policies are accomplishing their emissions reductions goals

The 2016 MRR data indicate impactful reductions in GHG emissions and progress toward reaching the state’s target emissions reductions by 2020. The 2016 emissions drop is a consequence of several factors: a CARB analysis of the year’s electricity generation points to increased renewable capacity, decreased imports of electricity from coal-fired power plants, and increased in-state hydroelectric power production. To put it in perspective, the 20.5 MMt CO2e emissions reductions is equivalent to offsetting the energy use of about 2.2 million homes, or 16% of California’s households.

Emissions below the cap are a climate win, not a concern

Total covered emissions in 2016 were about 324 MMt CO2e, well below California’s 2016 cap of roughly 382 MMt. Some observers of the cap-and-trade program worry that an “oversupply” of credits will result in reduced revenue for the state and lesser profits for traders on the secondary market. This concern was especially pronounced when secondary market prices dipped below the price floor in 2016 and 2017.

Importantly, oversupply of allowances is not a bad thing for the climate. As Frank Wolak, an energy economist at Stanford, points out, oversupply may be a sign of an innovative economy in which pollution reductions are easier to achieve than anticipated. Furthermore, having emissions below the cap represents earlier than anticipated reductions which is a win for the atmosphere. Warming is caused by the cumulative emissions that are present in the atmosphere so earlier reductions mean gases are not present in the atmosphere for at least the period over which emissions are delayed.

While market stability is a valid concern, the design of the program has built-in features to prevent market disruptions. Furthermore, the California legislature’s recent two-thirds majority vote to extend the cap-and-trade program through 2030 provides long-term regulatory certainty. Both the May and August auctions were completely sold out suggesting that the extension has succeeded in stabilizing demand.

These results are a welcome reminder that the cap-and-trade program is working in concert with other policies to accomplish the primary objective of reducing emissions, and that we’re doing it cheaply is an added bonus. Early reductions at a low cost can lead to sustained or even improved ambition as California implements its world-leading climate targets.

As California closes its fifth year of cap and trade, it should be with a sense of accomplishment and optimism for the future of the state’s emissions.

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