EDF Talks Global Climate

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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How a Coalition of Carbon Markets Can Complement the Paris Agreement and Accelerate Deep Reductions in Climate Pollution

Paris_._Eiffel_Tower_in_the_evening_Final

International cooperation is essential to achieve the Paris Agreement’s long-term goal of keeping warming “well below” 2 degrees Celsius. While the Paris Agreement provides several market- and transparency-related tools that can help spur international cooperation, countries must now create the coalitions needed to move forward with implementation. Image Source: Jorge Royan

As countries gather here in Bonn, Germany to begin the work of translating the historic Paris Agreement into action, there is widespread recognition that individual countries’ carbon-cutting pledges must be strengthened in the coming years to deliver the ambitious long term goal agreed in Paris: keep warming “well below” 2 degrees Celsius (3.6 degrees Fahrenheit), and achieve global net zero emissions before 2100.

The Paris Agreement provides several market- and transparency-related tools that can help spur the international cooperation necessary to achieve its long term goal, including provisions that facilitate high-integrity, “bottom-up” linkages of domestic carbon markets to cut carbon pollution. These linkages (described in Article 6 of the Paris Agreement as “cooperative approaches”) promise to reduce costs, and unlock the finance needed to drive deeper global emissions reductions. The agreement on cooperative approaches in Paris reflects the widespread recognition among nations that carbon markets, accompanied by a clear, comprehensive transparency framework, will help drive the deep emissions reductions needed to prevent the most severe impacts of climate change.

With the urgency of climate action clear, the key challenge now becomes: how can we accelerate the international cooperation needed to solve the Paris equation?

One concrete step, drawing on the cooperative approaches provisions of the Paris Agreement, would be to establish a coalition of carbon market jurisdictions to catalyze the development and increase the ambition of domestic carbon markets.   Much as the General Agreement on Tariffs and Trade (GATT) helped broaden participation and ambition in trade, a voluntary coalition of carbon market jurisdictions (CCM) could expand the scope and maximize the cost-effectiveness of ambitious climate action around the globe.

Why coordinate on carbon markets?

As carbon markets continue to expand, coordination among jurisdictions using or considering carbon markets – especially on the rules and standards needed to ensure environmental integrity and maximize cost-effectiveness – will give governments and the private sector the confidence to go faster and farther in reducing their climate-warming pollution.

A coalition of carbon markets can help deliver on the promise of the Paris Agreement and catalyze the deep global emissions reductions that climate science demands.

Although the Paris Agreement provides a framework for international cooperation on carbon markets, it is ultimately up to countries to work together to agree the detailed rules necessary for international carbon markets to drive emissions down and investment up.

The good news is that groups of countries can make substantial, early progress, ultimately informing and complementing the longer-term UNFCCC process.

 

“Minilateral” efforts can stimulate faster, deeper emissions cuts and strengthen international cooperation

Rapid and early emissions cuts are the single most important determinant of whether the global community is likely to meet the Paris Agreement’s goal to limit warming to well below 2 degrees Celsius (3.6 degrees Fahrenheit). And delaying necessary action to reduce global warming pollution dramatically increases costs to the global economy.

For both the climate and our economies, not all emissions reductions are the same:  the earlier, the better.

That’s why it is so important that Article 6 of the Paris Agreement affirmed that cooperative emissions trading between countries can continue and expand while multilateral accounting guidelines are developed. Transactions will need to be “consistent with” any multilateral guidance developed by Parties to the Paris Agreement over the coming years – particularly to ensure that the same emission reductions are not claimed toward more than one mitigation pledge (“double counted”).

A “minilateral” coalition of carbon markets could complement efforts under the UNFCCC by fostering agreement on detailed standards for the accounting, transparency, and environmental integrity of internationally transferred emissions units. These “nuts and bolts” standards, which will help avoid errors in tallying up total emissions and traded units, form the bedrock of high-integrity emissions trading. Early agreement would give countries the confidence to move forward quickly in implementing their Paris pledges and a basis for increasing their ambition over time.

Practically speaking, future UNFCCC guidance on cooperative approaches will likely be influenced by working examples of international emissions trading, making the success of a carbon markets coalition an important precedent for broader cooperation on markets in the UNFCCC. This process could mirror recent progress on standards for reducing emissions from deforestation and degradation (REDD+), where technical advances made by countries in the Forest Carbon Partnership Facility contributed to greater progress in the UNFCCC.

What’s next?

In Paris, a diverse group of 18 developed and developing countries led by New Zealand announced that they will work quickly together to develop standards and guidelines to ensure the environmental integrity of international market mechanisms.

This group – or another similar coalition – could “set the bar” for market-based climate action by developing robust accounting and transparency standards for environmental and market integrity. Coordinated leadership by forward-looking jurisdictions would help ensure that the growth of international emissions trading is accompanied by enhanced ambition and real, permanent, additional, and verifiable emissions reductions.

Over a longer period, these same guidelines could support the establishment of a common trading framework among a coalition of carbon market jurisdictions. A framework might include mutual recognition of emission units, harmonized approaches to verifying emissions reductions and generating offset credits, and a shared trading infrastructure, which together could ensure environmental integrity and encourage more countries, states, and provinces to cap and price carbon.

Paris began a new, more ambitious chapter in the history of climate action, but much of the chapter is yet to be written. We’re in the race of our lives to finish the work of protecting future generations and building prosperous low-carbon economies. A coalition of carbon markets can help deliver on the promise of the Paris Agreement and catalyze the deep global emissions reductions that climate science demands.

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