Selected category: California

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.

Also posted in 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.

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California Models Climate and Air Pollution Action with Balanced Approach

Air pollution visible in downtown Los Angeles | Photo by Diliff, via wikipedia comms

California is once again demonstrating its bold climate leadership. As Washington, D.C. continues to abdicate its role as a climate champion, California is stepping up to extend its landmark cap-and-trade program, address local air pollution, and push California businesses forward toward a cleaner economy.

Environmental Defense Fund strongly supports AB 398 (E. Garcia) and AB 617 (C. Garcia), as well as their authors, Legislative leadership, and the Brown Administration. We commend their vision and initiative on a bill package that addresses the growing threat from climate change and improves public health outcomes by addressing local air pollution in the most impacted neighborhoods.

AB 398: Extending the cap-and-trade program

This bill seeks to extend California’s groundbreaking cap-and-trade program until 2030, with a 2/3 vote. We support this bill for 3 key reasons:

  1. This bill maintains the environmental integrity of California’s cap on emissions. By introducing a price ceiling on allowances, the Air Resources Board with the Legislature’s guidance provides greater certainty on costs. Done poorly, such a ceiling can put environmental outcomes at risk. This proposal addresses that concern by requiring that any excess emissions be made up for by high-integrity emissions reductions outside the cap. This ensures that California does not bust through its emissions cap.
  2. This proposal extends the economic benefits of cap and trade. California has added over a million jobs since cap and trade launched in 2013, and this bill includes important provisions to further develop a green workforce for the 21st century economy. At the same time, cap and trade encourages investments in alternative forms of fuel. This decreases our dependence on fossil fuels, which protects consumers from volatile gas prices.
  3. Extending cap and trade sets a national example for other states to follow. California is on track to meet our 2020 target of reducing emissions to 1990 levels, and the 2030 goal is even more ambitious. We are demonstrating that emissions reduction and a thriving economy can go hand-in-hand. And we will not leave our most vulnerable communities behind.

AB 617: Clean air for California’s most vulnerable communities

The second part of this essential package is an unprecedented air quality bill which seeks to address local air pollution in California’s most impacted neighborhoods. For EDF, these are the 3 main reasons we are committed to supporting this bill:

  1. This measure targets neighborhoods burdened by multiple sources of air pollution. California communities like Richmond, Modesto, or Torrance aren’t polluted by just cars or one refinery – they have many different sources of air pollution. This bill identifies these neighborhoods and focuses monitoring and emissions reduction plans based on burden, rather than source.
  2. Industrial facilities are required to upgrade their technology. There are many facilities that have not been upgraded in decades. This means they emit far more pollution than if current technology were used. This bill requires that industrial sources covered by cap and trade are retrofitted to a standard that reflects technological advances, but are also cost-effective.
  3. This bill increases penalties for big polluters. Many air pollution penalties haven’t been adjusted since the 1970’s. This bill increases these so big polluters no longer have an advantage over facilities that follow the law. This is critically important to hold polluters accountable, especially for the residents who live nearby.

Yes, there is still compromise in politics

California can address climate change without leaving communities behind.

The ability to compromise seems absent from most political arenas these days. The zero-sum strategies of filibusters and government shutdowns are more the norm than a negotiated settlement. However, the California State Senate and Assembly Leadership, along with Governor Brown’s Administration have re-discovered the art of the possible, and isn’t that what politics is all about? They have managed to find the compromise with stakeholders that addresses the twin challenges of climate pollution and air quality.

This package is a path forward that demonstrates to the country and to the world that California can address climate change without leaving communities behind.

There is no silver bullet to accomplish this, despite what we all wish. The environmental community needs businesses to thrive so California’s economy remains strong. Business needs the environmental community to hold them accountable. The Legislature needs all of us to help continue setting the standard on climate policy. We don’t get to take our ball and go home because things aren’t going our way.

As we demonstrate how to address climate change and air pollution, let’s also demonstrate to Washington, D.C. how to compromise. We urge the Legislature to support AB 398 and AB 617.

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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.

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California Legislature holds key to protecting health of Californians and our climate

The California Legislature is in the midst of a critically important discussion right now: how can the state do more to clean the air for all residents and address climate change?

As a native of South Los Angeles with deep roots in the environmental justice community, I’ve seen first-hand that there’s still more that needs to be done to improve our air quality. At the same time, California is a longtime leader on climate issues, in large part due to its cap-and-trade program that’s successfully limited climate pollution.

Assemblymember Cristina Garcia’s bill, AB 378, though still a work in progress, would provide incentives for major greenhouse gas emitters to reduce localized air pollution, on top of extending a key tool to keep their carbon emissions below a certain limit.

Right now, AB 378 is the only bill in the California Legislature that is seeking to both improve air quality in the most impacted local communities and fight climate change globally. Here’s why we think the Legislature must pass it as soon as possible.

 How we should extend cap and trade

The question we must ask ourselves is not whether we should extend cap and trade – we should, as I explain next – but rather how we can extend it. Three things need to happen for California’s cap-and-trade program to be successfully extended beyond 2020:

  1. The cap-and-trade program itself, which is succeeding in its goal of reducing carbon emissions, should be strengthened. This includes ensuring jobs are created across California neighborhoods – an issue the Legislature is working to address in other proposals – as well as better meeting the needs of rural communities.
  2. Air quality concerns in California’s environmental justice communities must be addressed. There are many suggestions of how this can be done, but this public health issue cannot be ignored.
  3. Cap-and-trade should be passed with a supermajority of votes (2/3 of both the state Assembly and the Senate) this session. That will provide it the greatest legal certainty in a post-2020 program, and inoculate cap and trade from further “illegal tax”-type challenges.

Why we should extend cap and trade now

The best way to continue California’s climate leadership and successful climate policies, is for the Legislature to extend cap and trade beyond 2020 this year with a 2/3 vote.

EDF is advocating for this extension because California’s cap-and-trade program:

  • Provides the certainty needed for a strong and stable climate program. Eliminating post-2020 uncertainty by voting on a cap-and-trade extension this year limits market volatility and creates greater price and revenue predictability. This in turn helps local businesses plan investments, hire new employees, and adopt the next groundbreaking technology.
  • Demonstrates that protecting the environment need not come at the expense of economic growth. California has added over a million jobs since cap and trade launched in 2013, far surpassing the national average. This includes blue-collar jobs in parts of the state plagued by high unemployment. California has also grown to be the sixth largest economy in the world.
  • Reduces greenhouse gas emissions. California is on track to meet its 2020 target of reducing these emissions to 1990 levels. Our 2030 goal is even more ambitious – 40% below 1990 levels – and to be successful we need to start aiming for that target now.

Remember why clean air and a healthy climate matter

There will be important policy to discuss in the coming weeks, but for now let us remember why we are pressing forward on climate and clean air legislation in the first place.

California has many communities that suffer disproportionately from poor air quality caused by major emitters. As someone who grew up in South Los Angeles, I understand the impact dangerous air pollution has on daily life. Like much of San Joaquin Valley, many of California’s most vulnerable communities struggle with some of the worst air quality in the country. More must urgently be done to deal with this public health crisis.

At the same time, all of California, and indeed the world, are facing the unprecedented threat of global climate change. This demands immediate and prolonged action, especially now.

That’s why we must continue California’s renowned climate leadership and pass – as soon as possible – legislation like AB 378 that can provide solutions for both local air pollution and global climate change.

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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.

Also posted in Emissions trading & markets, United States| Leave a comment
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