Selected category: Emissions trading & markets

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 California, United States| Leave a comment

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.

Also posted in California| Leave a comment

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.

Posted in Emissions trading & markets| Leave a comment

California carbon market's August auction results see slight rebound, but show need for post-2020 climate action

The results released today from California and Quebec’s latest cap-and-trade auction show a slight rebound in demand from results seen in May, but still demonstrate the need for a continued commitment on ambitious climate action beyond 2020. The results were released minutes after members of the California Assembly voted on ambitious 2030 targets; the final legislative votes are expected tomorrow.

The August 16 auction offered more than 86 million current vintage allowances (available for 2016 or later compliance) and sold just over 30 million. Approximately 10 million future allowances were offered that will not be available for use until 2019 or later; 769,000 of those allowances were sold.

These auction results represent a slight increase in demand from the May auction, where approximately 10% of the current and future vintage allowances that were offered sold. More allowances were also offered at this auction since allowances consigned by utility participants that were not sold in May were offered again at this auction.  The number of allowances offered for sale by utilities meant that the only state controlled allowances that sold were a small number of future vintage allowances.

California state controlled allowances that were not sold in August will not be offered again until two auctions clear above the floor price, representing a temporary tightening of the cap and a way for the program to self-adjust to temporary decreases in demand.

What changed and what is the same since the May auction

After May’s auction we pointed to several major factors that contributed to low demand: secondary market allowances were available for purchase below the floor price; regulated emissions have been below the cap allowing businesses to take a wait-and-see approach to purchasing allowances in advance of a pending appeal challenging the cap-and-trade auctions in the court of appeal; and need for increased certainty about the post-2020 cap-and-trade program.

Here’s what affected the August auction results:

  1. Secondary market prices have increased to right around the price of the current auction floor. This is likely the main factor contributing to the August auction’s slightly higher sales.
  2. There have been no further developments on the litigation as parties wait for the court to announce an oral argument schedule.
  3. There has been some movement on California’s effort to provide post-2020 certainty but not definitive action. In July, California's Air Resources Board released proposed amendments to set rules and a cap-and-trade carbon budget in-line with achieving a 40 percent reduction below 1990 levels by 2030. Final agency action is not expected until spring of 2017. The California Legislature is also considering a package of bills that would cement the 2030 target, currently in executive order, into statute. Assembly members voted today on climate targets and we will see whether legislative members will fulfill the will of over two-thirds of the California electorate by passing these targets.

California’s package of climate programs, including cap and trade, must first be evaluated based on whether emissions are going down – and the latest data from ARB in June showed that emissions do continue to decline. Selling out an auction and raising a set amount of revenue does not equate to overall success for the cap and trade program.

That said, once climate proceeds are in the Greenhouse Gas Reduction Fund (GGRF), spending them wisely to reduce emissions and benefit communities, especially disadvantaged communities, is a metric of program success. To date, about 1.4 billion dollars have been languishing in the GGRF, not creating benefits, and resulting in consequences for real Californians.

In addition to passing climate targets, Legislators should continue to act on proposals like the one Pro Tem Kevin de Leon has put forward to spend existing climate dollars this session.

Also posted in California| Tagged | Leave a comment

California's new spending proposals benefit communities and the environment, and highlight need for long-term climate policy

caption

Cropped image via Flickr/ mikeslife

California drivers, communities, and businesses have endured degraded roads, unending traffic, choking pollution, and limited transit options for years.  As the population continues to grow, so too will the problems of the transportation sector (and many other sectors) unless major investments are made.

Given the profound need to clean-up California’s infrastructure, Tuesday’s $390 million expenditure award by the California State Transportation Agency (CalSTA) and yesterday’s proposal by the State Senate to spend $1.2 billion of available dollars generated by California’s cap-and-trade auctions are important steps in reaching communities that need these upgrades most. What these critical spending plans also clearly demonstrate is that cementing 2030 pollution reduction targets into statute ensures continued investment in reducing emissions and benefiting communities.

The value of long term climate policy

It’s been no secret that a political debate is underway in Sacramento over setting long-term climate pollution targets for California. Why? Setting long- term policy will support the state’s low-carbon, prosperous economy. This process is important not just for climate change, but to ensure growth and stability in the business and investment climate that will enable our economy to flourish.

Long-term climate policy – including cap and trade and a suite of other measures – aimed at cutting pollution has been a boon to the state over the past decade, allowing the economy to flourish, resulting in massive venture capital investment, innovative products, and reduced pollution.

Within the cap-and-trade program, auctioning emissions credits has become an integral way to make the program work, though the purpose has never been to raise and maximize revenue. As a result, within the existing landscape, the auctioning of permits has allowed for additional environmental improvements through investments such as the 14 different transit projects just announced. Similarly, and as outlined by the State Senate’s proposal, the cap-and-trade program can drive myriad other investments that cut climate pollution, such as traffic flow improvements, low- carbon vehicles, energy efficiency, urban greening, and sustainable community development.

When completed, the 14 projects funded by the CalSTA will benefit nearly every major urban area in the state, transcending political boundaries, bridging economic divides, cutting air pollution, growing jobs, and reducing congestion. And, with 30 million cars on the road consuming gas at some of the highest prices in the nation, improved transit and transportation systems simply give drivers more options – saving money and creating better mobility in the long run.

The massive need to invest in California and cut carbon

Unfortunately, California has a far greater need than what this $390 million can meet (the California Transit Association projects a total need of nearly $175 billion), or what the $1.2 billion State Senate proposal would deliver. Fortunately, policies like cap-and-trade work to cut pollution through a declining cap on carbon and a price on carbon, resulting in innovation and investments in regulated businesses. As permits are auctioned, targeted investments of proceeds generated through those auctions can also produce air quality benefits while leveraging private capital and inspiring innovation.

Over the next couple weeks, Sacramento lawmakers can positively impact the long-term certainty of California climate policy and its ability to drive pollution reductions and ensure vital investments in areas like transit and improved transportation systems. The current expenditure plans and proposals — along with several billion dollars that have already been allocated — illustrate how programs such as cap and trade create real investment options that benefit people, communities, and the environment across the state.

Also posted in California| Leave a comment

California carbon market's latest auction results show continued resilience

Source: Wiki

May 2016 auction results show an ongoing lawsuit challenging California's cap-and-trade program’s allowance auctions is likely impacting market dynamics, but the market is proving resilient. Image Source: Wikipedia

The results of California and Quebec’s latest carbon auction show that an ongoing lawsuit challenging the cap-and-trade program’s allowance auctions is likely impacting market dynamics, but that California’s market is proving resilient, in part due to the strength of its design.

The May 18 auction, the second of 2016, offered 67,675,951 current vintage allowances (available for 2016 compliance) and sold only 7,260,000. Just under one million of the just over ten million future vintage allowances (available for use in 2019 and after) were sold. The unsold California state allowances will go back to the auction holding account and will not be available for sale until the auction clears above the floor price for two consecutive auctions, a critical regulatory feature that removes unexpected, excess supply from the market and provides further price support. Utility allowances that were consigned to auction and did not sell will be offered again for sale at the next auction.

Increased attention to the litigation brought by the California Chamber of Commerce and the Morning Star Packing Co. et al., as well as higher participation in the secondary market, caused lower demand for allowances in the May auction. Secondary market prices have traded as low as 44 cents below the floor price in the last couple of months. But the real story is the positive and stabilizing impact of the floor price itself.

Other markets without such a strong floor price have seen price drops that are much more dramatic when the market receives a disturbance. But in California, the volume of trades on the secondary market has been higher than usual, showing that some entities are taking the opportunity to buy allowances at a discount.

It's worth noting that these results in no way impact the overall performance of California's program, which will continue to incentivize carbon pollution reductions.

EDF’s take on the litigation of the cap-and-trade auction program’s legality

At this critical juncture, opponents continue to litigate and challenge carbon auctions, an integral component of the cap-and-trade program that promotes equity and a healthy carbon market.

We are confident, however, that California courts will ultimately confirm the Legislature’s broad grant of authority to the California Air Resources Board (ARB) to design effective programs to address the imminent threat of climate change, and will reject the claim that auctioning valuable, marketable emission allowance constitutes an unconstitutional “tax.”

In supplemental briefings submitted May 23 to the California court, ARB argued persuasively that, even if the intermediate appellate court were to find a legal flaw in the auction, there would be no valid legal justification for disrupting the cap-and-trade program including its auction components while the state Supreme Court considers the case or ARB develops a suitable solution. This outcome is well-grounded in legal precedent affirming courts’ obligation to avoid remedies that imperil public health and welfare or cause needless disruption to public and private interests that rely on the current status quo.

California’s ability to continue utilizing a cap-and-trade program designed to meet its needs through 2020 and beyond is essential to California and to global climate momentum.

While EDF has a high degree of confidence that the lower court decision rejecting the challengers’ claims will be upheld, even if it is not, settled judicial procedures should help to ensure that the environmentally and economically important cap-and-trade program continues with minimal disruption.

California’s ability to continue utilizing a cap-and-trade program that is designed to best meet the state’s needs through 2020 and beyond is essential not just to California itself, but also to global climate momentum.

We’re at a watershed moment for climate action, and California is at the forefront. The U.S., China, and 173 other countries signed the Paris Agreement last month, and a group of leaders convened by the World Bank and the International Monetary Fund expressed a goal of moving from 12% to 50% of global carbon emissions covered by carbon pricing by 2030. All the while, California is providing one of the most successful examples of economy-wide carbon pricing that is reducing emissions and promoting equity while the state’s economy is thriving.

There is every reason for confidence both in the legality of CARB’s choice to auction allowances and in the commitment of California’s leaders to deliver on California’s climate goals. We expect that a resilient cap-and-trade program will remain at the heart of the state’s increasingly ambitious and effective climate strategy long into the future.

Also posted in California, News| Tagged | Leave a comment
  • Get new posts by email

    We'll deliver new blog posts to your inbox.

    Subscribe via RSS

  • Categories