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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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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.

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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.

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