Selected category: Emissions trading & markets

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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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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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.

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California’s ambitious new climate commitments follow 10 years of success

Photo credit: Joseph Thornton | Flickr.com

California made history a decade ago this month by being first in the nation to pass legislation (AB 32) putting an absolute limit on carbon pollution through 2020.

The California Legislature made history again last week by extending and strengthening those limits to 2030 (SB 32 and AB 197). SB 32 requires California to reduce pollution 40% below 1990 levels by 2030 – as ambitious as Europe’s climate policies – and provides the flexibility to use a variety of tools to accomplish this goal. The governor has announced he will sign both bills.

Legislators also passed a spending plan yesterday that will direct approximately $900 million in cap-and-trade proceeds to reduce pollution and benefit California communities, especially the most disadvantaged.  Another bill passed yesterday, AB 1550, increases the commitments of those disadvantaged communities and makes low-income communities beneficiaries as well.

California’s decision to set these new targets and establish this new spending plan was not just based on hope and necessity, but on a 10-year foundation of success and a solid understanding that this next set of targets are ambitious but achievable.

Here’s why California’s climate program has been a success, and why the new long-term emissions reduction target will help the state continue to thrive.

California’s carbon pollution is declining.

AB 32 requires California reduce its greenhouse gas emissions to 1990 levels by 2020, a reduction estimated at about 15% below where emissions would have been without regulation.  To meet these reductions, California has adopted a suite of climate policies anchored by a cap-and-trade program, which puts an absolute limit on carbon pollution, while providing cost-effective options for businesses to meet their reduction obligations.

California’s carbon pollution has steadily declined in the last 10 years. In the first two years that the cap-and-trade system was in place (2013 and 2014), California’s carbon emissions declined by an amount equivalent to taking over 1 million passenger vehicles off the road for a year.

California is ahead of schedule in meeting its 2020 goal. Emissions have been below required levels in every year we have data for. Regulators expect that in 2020 California will exceed its own requirements by an amount that is equivalent to taking 3.3 coal burning power plants off-line for one year.

California’s economy is growing.

Historically economic growth has been accompanied by a corresponding increase in emissions, but California is charting a different course. The state’s Gross State Product has increased steadily since the recession as emissions have continued to fall, as shown in this figure:

In the first two and a half years of California’s groundbreaking carbon market, the state added over 900,000 jobs, a growth rate that eclipsed the national rate.

Carbon markets are going global.

The impressive outcomes from the first decade of California’s AB 32 implementation have attracted numerous partners. States, provinces, cities and countries are taking note and action.

At the Paris negotiations at the end of 2015, California Governor Jerry Brown showcased a “Memorandum of Understanding,” bringing together states and regions committing to reducing greenhouse gas emissions to at least 80% below 1990 levels by 2050, or to less than 2 metric tons per capita by 2050. Over 100 states, provinces, and cities, representing one quarter of the world economy, signed on the agreement.

In addition, California is partnering directly with several Canadian provinces to implement joint cap-and-trade programs. It has also established an agreement to share information and work with China and Mexico on their carbon pricing efforts.

2030 target is ambitious but achievable.

Estimates suggest that after on-the-books polices are implemented, California will still have to find a way to reduce pollution another 17-29 percent to meet the 2030 target. The Air Resources Board has proposed relying on a ratcheting up of existing polices and a reliance on the existing cap-and-trade program to ensure the 2030 target is met.  Research from the Lawrence Berkeley National Laboratories shows that meeting the 2030 target is possible with a ratcheting up of existing polices

The world will be watching whether California can repeat its gold medal performance under these new targets, and all indicators seem to point in the state’s favor.

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EDF-IETA maps show how the world can double down on carbon pricing

Carbon pricing

Currently, about 12% of the world's greenhouse gas emissions are covered by carbon pricing. More details about this map can be found in the Doubling Down on Carbon Pricing report by EDF and IETA.

There are a number of signs we are entering a golden age for carbon pricing. Perhaps the most important one is that many countries around the world are currently considering carbon pricing policies to achieve their greenhouse gas emissions reduction goals.

And for good reason.

A price on carbon gives emitters a powerful incentive to reduce emissions at the lowest possible cost, it promotes innovation while rewarding the development of even more cost-effective technologies, it drives private finance, and it can generate government revenue.

This spring, World Bank Group President Jim Yong Kim and International Monetary Fund Managing Director Christine Lagarde convened the Carbon Pricing Panel to urge countries and companies around the world to put a price on carbon. On April 21, 2016, the Panel announced the goals of doubling the amount of GHG emissions covered by carbon pricing mechanisms from current levels (about 12 percent, as illustrated in the map below) to 25 percent of global emissions by 2020, and doubling it again to 50 percent within the next decade.

EDF and the International Emissions Trading Association (IETA) worked together to explore a range of possible, though non-exhaustive, scenarios for meeting these goals. You can see the results in a series of maps which show how carbon pricing can be expanded worldwide.

Achieving the Carbon Pricing Panel’s goals will be a crucial stepping stone to realizing the ambition of the Paris Agreement, which aims to hold the increase in the global average temperature to well below 2°C above pre-industrial levels. Meeting that objective will require countries not only to implement the targets they have already announced, but to ratchet up their efforts dramatically in the years ahead. Carbon pricing will have to play a key role in that effort.

Explore how the world can reach the Carbon Pricing Panel’s ambitious goals.

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