California-Quebec carbon market participants appear to wait for future auctions and more information

California cap and trade, renewable energy

California's Alta Wind Energy Center, Image Source: flickr

Carbon auction results released today show low demand for California’s carbon allowances in the first carbon auction of 2017, with only 18% of allowances selling.

The results say more about the many milestones that are ahead for the cap-and-trade program rather than anything about the cap-and-trade program’s core function of reducing overall emissions.

Results from the February 22 auction show:

  • The auction offered more than 65 million current vintage allowances (available for 2016 or later compliance) and sold about 11.6 million. Most of these allowances were utility-held allowances and some were from the province of Quebec. No ARB current allowances sold.
  • Almost 10 million future allowances were offered that will not be available for use until 2020 or later; a little over 600,000 of those allowances sold.
  • This means only about $8 million was raised for the Greenhouse Gas Reduction Fund.

Why cap and trade is working

Auction results themselves cannot tell us whether cap-and-trade is “working.” Though selling most allowances offered at stable prices at or above the minimum or floor price is generally a good sign, the reverse does not necessarily indicate that something went wrong with the cap-and-trade program itself. Disappointing auction result could simply be a product of the market’s expectation that more information on which to make an investment decision and plenty of allowances will be available in the future.

The best indicator is whether greenhouse gas emissions are declining.

The best indicator of whether California’s climate policies, including cap and trade, are working is whether greenhouse gas emissions are declining. As we reported in November’s auction blog, all indications suggest California’s policies are reducing emissions.

Another important factor is whether California’s economy continues to thrive as the state implements some of the most ambitious climate policies in the world. Recent data from the Bureau of Labor Statistics shows that in 2016, California continued to add jobs faster than the national average, as it has in every year that cap and trade has been in place.

So what explains current low demand

Outstanding litigation brought by the California Chamber of Commerce and others challenging California’s cap-and-trade program design is likely still hampering sales of allowances and negatively affecting the auction, as many participants may be waiting to see how the Court of Appeals rules on the legality of carbon market auctions. Oral Arguments were held in late January and a decision is likely by the end of April.

At the same time, Governor Brown in January asked the Legislature to extend the cap and trade program beyond 2020 with a two-thirds vote; the supermajority vote, also recommended by the independent Legislative Analyst’s Office, could insulate the cap-and-trade program from legal challenges like the one brought by the Chamber. Two bills currently in the Assembly – AB 378 (C. Garcia) and AB 151 (Burke) – could both facilitate the extension of cap and trade and be passed with a two-thirds vote. But we are still early in this process and the market is clearly still waiting to see how the Legislation plays out.

What we can understand from California’s February carbon auction

  • Regulated businesses under the cap-and-trade program will have to purchase a large portion of available allowances in order to comply with the cap-and-trade program requirements. It appears they have just decided to deploy the wait-and-see strategy they utilized in May and August, perhaps hoping for more information perhaps in advance of the next auction.
  • One thing that is different between this auction and the May auction that also saw similarly low demand, allowances prices on the secondary market were quite close to the current floor price of $13.57. This means that entities are still valuing carbon allowances close to the floor price, showing expectations of a steady market in the future, there just wasn’t quite enough demand to soak up all the supply in this auction.
  • The November auction when 88% of allowances sold was the last time participants were able to buy allowances for $12.73 at auction instead of the 2017 floor price of $13.57.  This opportunity for lower cost allowances seems to explain the higher demand in November.
  • Importantly, the ARB allowances that went unsold represent a temporary tightening of the cap. They will not be offered again until two auctions have fully sold all available current allowances. This is an important self-regulating design feature of the cap-and-trade program that helps stabilize prices in the face of inevitable market fluctuations in supply and demand.

What to expect from 2017 auctions

Two major developments this spring may provide more certainty about the post-2020 cap-and-trade program, which we’ve noted before could significantly increase auction demand. First, there will likely be a decision from the appeals court on the California Chamber of Commerce case. There could also be more clarity on the bill or package of bills that could move through the Legislature this year.

The core functions of the cap-and-trade program are operating as intended, reducing carbon emissions while the economy thrives.  But it remains to be seen whether the Legislature will be able to act to provide the highest level of certainty for the cap-and-trade market.

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Mexico's international climate leadership and collaboration is more critical than ever

love-earth

Photo credit: Sweetie187/Flickr

The stark realities of the environmental policy challenges we are likely to face, in the United States and internationally, have not faded in the month since the U.S. election.

During his campaign, I and many others were deeply troubled by the statements President-elect Trump made about Latinos, African-Americans, women, people with disabilities, immigrants and other religious groups, as well as our critical relationship with Mexico. He called climate change a “hoax”; vowed to “cancel” the Paris climate agreement; and pledged to undo the Clean Power Plan, the regulation that would put the first-ever limits on carbon pollution from power plants in the United States. Just last week, he selected a climate denier, and sworn opponent of bedrock protections for clean air and clean water, as his pick to head the U.S. Environmental Protection Agency.

But in the days following the election, I have been heartened by messages of empathy and solidarity from my friends and colleagues from around the world. These messages remind me that as a community we have strength – and that we can and will keep pushing forward, together. Our resolve is greater than ever, and there are many reasons for hope.

First, no one country can solve climate change alone – and thus no one election, in any country, can put the solution out of reach. A single president cannot reverse the hard-won progress of the world’s countries, who came together in 2015 to craft the historic Paris climate agreement, and met again last month in Marrakesh to continue putting that plan into action.

Mexico has taken on global leadership on the issue of climate change – pledging ambitious reductions to its national emissions, and forging collaborations in North America with the state of California, and the provinces of Quebec and Ontario, among other international partnerships. Mexico’s leadership and international collaboration now play an even more critical and influential role in the global effort on climate change, and particularly in North America. And Mexico will not be alone in moving forward to develop a low carbon economy – emissions giants including China have pledged they will continue to move forward with their plans to reduce emissions, and use market-based mechanisms to get there.

The transformation underway toward clean energy and low-carbon economies is unstoppable.

Second, the transformation underway toward clean energy and low-carbon economies is unstoppable. In 2014, the U.S. clean energy market, which includes wind turbines, solar panels, home energy storage and energy efficiency, grew by 14 percent – at nearly five times the rate of the overall economy – to nearly $200 billion. And hundreds of major businesses just called on the new Administration to meet US carbon pollution reduction targets, invest in clean energy, and implement the Paris climate pact.

Even beyond the Paris Agreement, the world is beginning to shift. The reform and modernization of Mexico’s power sector, as one example, has the potential to transform its economic and energy future in way that is both more profitable and more sustainable.

California has been leading the way on climate change and energy innovation in the United States – and working in active partnership with Mexico on climate change since 2014. California’s also forged a collaboration among more than 130 subnational governments representing more than half of the world’s GDP through the Under 2 MOU.

And let us not overlook that two-thirds of Americans want reducing carbon pollution to be a priority and over 80% of Americans support boosting clean energy sources such as wind and solar.

Our work in Mexico has all the key ingredients we need to succeed. Our partners in Mexico, from government to civil society, are committed – as are we – to working in partnership to put our collective knowledge, expertise, creativity, and will to the task of fighting climate change – together.

I know that I will, and my organization will, continue to face and fight the battles ahead for protecting our health, the climate, and clean air, healthy ecosystems, and clean water – and there will, no doubt, be many.

I am extremely proud of my work and I am fortunate to come to work every day and be a part of the global effort to solve one of the most formidable environmental challenges of our time, and to work in partnership with dedicated leaders and committed citizens of Mexico.

Posted in Mexico, United States| Leave a comment

Three reasons why it’s not too late to save the Amazon

Amazon Forest

Amazon Forest. Photo by Joseph King/Flickr

The latest New York Times Retro Report, “The Fight to Save the Amazon,” shows how Chico Mendes's ideas, his story, and the indigenous and local forest communities’ fight for their land rights that he gave his life for, have changed the Amazon, Brazil and the world – and how very far from over the fight is. My last post discussed what hasn't changed in the Amazon rainforest in the 28 years since Chico Mendes was assassinated. Here, I discuss three major changes to which Chico and indigenous leaders, including the Kayapô leaders Raoni and Megaron, profiled in the story, made major contributions.

What has changed since the fight to save the Amazon began in the 1980s?

1. The whole idea of development has changed.

Part of what gave the ranchers and land-grabbers who killed Chico such confidence that no one would be held to account for the crime was they thought they were on the right side of history. “The gringos cut down all their forests and got rich – why shouldn’t we?” was the received wisdom. When Chico said “We realized that in order to guarantee the future of the Amazon we had to find a way to preserve the forest while developing the region’s economy,” he was way ahead of the curve.

Now no one says that deforestation is the price of progress anymore – and deforestation was down about 80% between 2004 – 2014, while cattle and soy production increased. Brazil’s Agriculture Minister, mega-soybean producer Blairo Maggi, says that nobody is more conscious of the need to stop deforestation than farmers, because they know that standing forest is critical for the rain they need. Maggi – as well as agribusiness, state governments, indigenous groups, grassroots social movements like the rubber tappers’ movement, and many in the federal government – now agree with Chico that the Amazon needs real economic incentives to make forest protection a viable environmental asset.

2. Environmentalists recognize that indigenous and other forest peoples’ land rights are central to forest protection – and Amazon social movements see environmentalists as allies.

When Chico was alive, mostly environmentalists thought that people in the forests were the problem and that real conservation was about finding the highest-biodiversity and most remote, inaccessible pieces of forest possible and setting up parks with guards. While defending remote high-biodiversity forest is a good thing, leaders like Chico, Raoni and Megaron , showed the world that their people were holding the line against the advance of the lawless, entirely unsustainable frontier. Environmentalists – and increasingly, Brazilian public opinion –came to support indigenous and forest peoples’ rights and recognize that protecting the forest is a valuable service. This has greatly helped swing numerous local struggles to the Indians’ and forest peoples’ side.

Today, nearly half of the Amazon (think of half the land in the continental US west of the Mississippi) is officially recognized indigenous territories and environmentally protected areas (almost all of which are occupied by forest communities like Chico’s) and these territories are a big part of the reason Brazil is the world leader in reducing greenhouse gas pollution because of its success in reducing Amazon deforestation.

3. Companies are getting on board with deforestation-free commodity supply chains.

In Chico’s day, a lot of economic activity in the Amazon wasn’t very efficient and was heavily subsidized. Global markets, with the partial exception of timber, didn’t really connect with the Amazon.

Since then Brazil has become an export agriculture powerhouse, and major multinationals like Cargill and Walmart source a lot of soy and beef in the Amazon. But, as Fight for the Forest explains so well, Amazon deforestation became a global issue after Chico’s assassination and the Kayapo convergence against the Belo Monte dam, and it has remained on international public opinion and decision makers’ agendas. Big consumer goods companies like Walmart, Unilever and Marks and Spencer found out that having their brands stained with the ashes of dead forests was bad business, so many of them have committed to zero-deforestation supply chains, and are telling their suppliers they’ll need to comply to do business. That’s a message farmers and ranchers get – even though the last three years’ increases in deforestation show that the gap between taking the pledge and making it happen is large, and governments need to stop backsliding on law enforcement.

The people who killed Chico were fundamentally wrong. Chico died, but he didn't lose.

It’s worth remembering, as we head into what could be a time of great trial and trouble for the environment, that when Chico started out, the odds were seriously stacked against him. Dirt poor, illiterate, and under the thumb of an unenlightened  oligarchy at the end of world isn’t a great resume for most-likely-in-class-to succeed.

Chico started from a position far more disadvantaged, and had to overcome greater challenges than just about anyone who will read this. But he changed the world. Let him be an example to us.

Posted in Brazil, Deforestation| Leave a comment

28 years after Chico Mendes’s death, four environmental challenges still facing the Amazon

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Chico Mendes in the window of his home with Sandino, his son, in Xapuri, state of Acre, Brazil. Author: Miranda Smith, Miranda Productions, Inc. November 1988. Photo: Wikimedia Commons

I was at home on the evening of December 22nd, 1988 when I got the call from Brazil telling me that Chico Mendes had been murdered a few hours earlier.

Chico Mendes's ideas, his story, and indigenous and forest communities’ fight for land rights that he gave his life for have changed the Amazon, Brazil and the world. But the fight is far from over.

I, and Chico’s other friends, had thought that drawing media attention to his struggle to protect the forest and forest communities against the depredations of land-grabbing cattle ranchers would protect him. We were tragically mistaken.

But the cabal of land grabbers and their hired guns who killed Chico were wrong on a deeper level. They thought that his murder would go unnoticed, and that even if it didn’t everyone would know that cutting down the forest and driving a few poor rubber tappers off the land was the price of progress – inevitable.

The latest New York Times RetroReport, “The Fight to Save the Amazon,” does a very good job of showing both how very much Chico’s ideas, his story, and the indigenous and local forest communities’ fight for their land rights that he gave his life for, have changed the Amazon, Brazil and the world – and how very far from over the fight is. My next post will address what’s changed over the past 28 years, but here I’ll address four things that haven’t.

What hasn’t changed since the fight to save the Amazon began in the 1980s?

1. The frontier is still lawless.

Even though government and state agencies have stepped up enforcement, particularly since the 2004 Plan to Prevent and Control Amazon Deforestation, about 30% of the Amazon is still at risk for illegal logging, deforestation, gold mining and land grabbing.

Deforestation went down from about 27,000 km² in 2004 to a little over 4,000 km² in 2012 – but since then has oscillated around 5,000 km² and now has increased two years in a row, to an alarming near-8,000 km² this year.

It seems that a big part of the residual deforestation is linked to illegal activities, if not organized crime. Environmental/land rights activists like Chico don’t get killed in his home state of Acre, where ten years after he died, his people came to power and have made the state a sustainable development leader. But Brazil is still the world leader in killings of environmental activists, such as Luiz Alberto Araújo, municipal secretary of environment, murdered in Altamira, Pará on October 13th. Dismantling land grabbing and illegal deforestation gangs (as the Federal Police have clearly shown they can do in the last few years) and aggressively prosecuting their leaders need to be high priorities, and gathering the intelligence to do it needs dependable support.

2. The forest is still worth more dead than alive.

Chico’s prescient ideas on the need for forest protection while developing the Amazon economy have won the rhetorical war – but the actual incentives needed to create robust economic alternatives for indigenous peoples and forest communities, compensate good-actor landowners willing to forgo legal rights to clear forest, and fund the shift to high-value, zero-deforestation agriculture for family farmers and agribusiness alike have yet to materialize, and Brazil’s climate negotiators are not helping. Brazil should open up to emerging carbon markets to fund the elimination of deforestation in the Amazon and other biomes, while also pursing public donor funding.

3. Technology and capital to build 21st century supply chains and develop markets for sustainable forest products are still lacking.

After Chico was killed and his story went viral a wave of newly minted MBAs washed over the Amazon, full of passionate conviction that commercially viable sustainable alternatives based on non-timber tropical forest products were there for the taking (Full disclosure: I thought so too, at the time.) Then they figured out that bringing products of highly variable supply and quality to market over continental distances and no infrastructure wasn’t all that good a recipe for business success.

In some places, though, governments and NGOs kept at it, and developed alternatives that yield real benefits for local people. In Acre, for example, the government has invested heavily in things like fish farming on already cleared land, a high-tech condom factory using native rubber latex, and scaled-up Brazil nut processing technology.

In the Xingu indigenous territories and protected areas, NGO Instituto Socioambiental has brought in state-of-the-art technology to add value through local processing of fruits, nuts and oils, while training local people to collect native tree species seeds for sale to famers obliged by law to restore degraded lands. Alternatives like these raise incomes and help the communities get access to the market, and with investment, could help landowners derive sustainable value from the 80% of their holdings they’re required to keep under forest cover. But with over 2 million km² (equal to the size of four Californias) of indigenous territories and protected areas, these innovative pilots will need major investment and a world of new technology to come to scale.

4. The weather in the Amazon is still changing for the worse.

Chico saw before almost anyone else that the weather in the Amazon was changing. The combined effects of climate change and deforestation on regional and global rainfall regimes are provoking more frequent and intense droughts, and causing runaway forest fires in places that were always too moist to burn, even in the dry season. About half the rain that falls in the Amazon is from moisture cycled into the atmosphere by the forest itself – about 20 billion tons of water a day.

If climate change, deforestation and fires continue feeding off of each other, the Amazon ecosystem could unravel, and large parts of the forest could change into savanna. This could affect rainfall patterns as far away as California, and seriously reduce agricultural production in Brazil and other countries.

In one of the last interviews Chico gave before he was killed, he talked about the death threats he was getting and said he wanted to live to save the Amazon. In my next post, I’ll talk about some of the things that have distinctly changed for the better in the last 28 years – in no small measure because of Chico’s life and story – that make saving the Amazon a real possibility.

Posted in Brazil, Deforestation| Leave a comment

Good news in California as carbon auction results improve, and carbon emissions continue falling

Co-authored by Erica Morehouse and Jonathan Camuzeaux.

While we hope President-elect Trump will listen to the almost unanimous global voice of governments and business leaders who all understand that we must act to avert catastrophic climate change, it’s indisputable that leadership from U.S. states will be of paramount importance. Amidst this chaos and uncertainty California and Quebec are now four years into a successful cap-and-trade program with shrinking carbon pollution footprints and thriving economies.

California and Quebec released results today from a much anticipated carbon auction that took place on November 15, and sold a greater number of allowances than in the past two auctions resulting in proceeds for the state Greenhouse Gas Reduction Fund.  This good news comes after California’s 2015 greenhouse gas reporting data earlier this month showed another year of carbon pollution decline for the Golden State.

These year-over-year pollution declines are the most important indicator of success.  But understandably the auction performance and amount raised for climate investment priorities will get a lot of attention in California, Quebec, and Ontario, which is slated to launch its own cap-and-trade program in January with linkage likely to California and Quebec in 2018.

Auction results see increased demand

The November 15 auction offered more than 87 million current vintage allowances (available for 2016 or later compliance) and sold almost 77 million. Approximately 10 million future allowances were offered that will not be available for use until 2019 or later; over one million of those allowances were sold.

These auction results represent a significant increase in demand from the August auction which offered a similar number and sold about 31 million allowances, up from a little over eight million allowances sold at the May auction, the first auction to experience very low demand for allowances.  The May and August auctions raised almost no revenue for the California Greenhouse Gas Reduction Fund (GGRF).  While final numbers won’t come in for another few weeks, based on the allowances sold, this auction likely raised over $360 million for the California GGRF. 

Impacts on demand for this auction

A number of factors, good and otherwise, contributed to this quarter’s results.

  1. One of the most immediate factors that likely contributed to increased demand in this auction is the knowledge that the minimum sale price or “floor price” will rise to about $13.50 in 2017. This is the last auction that participants will be able to purchase allowances for $12.73 before the annual increase.
  1. A constant during this and previous auctions is litigation brought by the California Chamber of Commerce and others challenging California’s cap-and-trade program design. The case was brought the day before California’s very first auction in 2012 and California won at the trial court level. The plaintiffs appealed, and the Court of Appeals will hear oral arguments on January 24, 2017. This outstanding litigation may be leading some potential auction participants to take a wait-and-see approach.
  1. This wait-and-see approach is only possible if regulated businesses in California already have enough allowances to cover their 2016 obligations. California just released preliminary data for 2015 which shows emissions were about 14 percent below the cap. This suggests a successful set of climate policies that are incentivizing polluters to lower levels of pollution below required levels if they are able.  Some have referred to this as an oversupply of allowances, but it’s perhaps more accurate to refer to it as over-compliance.  Businesses have a choice of how to respond when they over-comply: avoid buying allowances in a future auction or buy allowances when they are presumably cheaper and bank them for future use.

A big question is how much the passage of SB 32 in August has impacted auction demand.  Governor Brown had previously established a target of reducing carbon pollution 40 percent below 1990 levels by 2030 through an executive order, but SB 32 cemented this requirement into law making it much more certain.  Setting a 2030 target could increase demand for allowances, but the market will not necessarily get certainty about that target or how California will meet it in one fell swoop.  While SB 32 set the 2030 target, like AB 32 it was silent on policy tools to meet that target so decisions about cap-and-trade post-2020 are still outstanding.

Greenhouse gas emissions decline again in 2015

California’s Mandatory Greenhouse Gas Reporting program requires that state’s largest polluters to report their emissions annually. The California Air Resources Board released the final tally of 2015 greenhouse gas emissions on November 4th, which showed yet another year of carbon pollution decrease.

In 2015, California’s emissions covered under the cap-and-trade program decreased by roughly one percent compared to the year before. California is on track to meet its target of reducing pollution to 1990 levels by 2020.  Carbon pollution for capped and uncapped sources was down in 2015.

Meanwhile, data from the Bureau of Economic Analysis shows the state’s gross domestic product increased by almost six percent in 2015 – while California also experienced an increase of total employment of a little over two percent in 2015 – proving again that economic output and emissions don’t necessarily go hand in hand.

With these results California is on solid footing to continue as a beacon of hope for climate action in the United States and perhaps even to attract new partners inside or outside the country who are ready to join a successful program.

 

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What happened to agriculture's potential for action at the "COP of Action"?

By Jade Lu, Environmental Science and Biology major at Duke University, and Dana Miller, EDF Policy Analyst

November 14, 2016 – the SBSTA closing plenary at COP22 in Marrakesh, photo by Dana Miller

Hailed as the “COP of Action” since before its opening, COP22 no longer holds such promise for agriculture. The scene seemed set for action: the Paris Agreement opened the doors for real progress on agriculture and there were clear commonalities in both country goals and practices. During the negotiations, while there were differences, countries were able to agree on some significant issues and worked hard to reach a decision. However, differences won out and countries were not able to focus on these areas of consensus to reach a substantive decision when the agenda item closed on Friday, postponing discussions until the next negotiations in May 2017. So, how did this happen, and where do we go from here?

The promise for action

As parties began to discuss agriculture, they unearthed many areas of common ground. There was a strong sense of urgency and desire for action shared by many countries. Countries agreed on the need to explore policy options to spur action. Countries also acknowledged the need to address climate change through good agricultural practices and to share knowledge and lessons learned. As we wrote in our last blog and analysis, countries are already implementing many common practices, which they shared in their submissions to SBSTA 44. These practices include efficiently managing resources like water, nutrients, and soil, which can have multiple benefits for adaptation, mitigation and productivity.

Full negotiating texts were put forward, giving parties a starting ground. This was further than negotiators had gotten since discussions on agriculture started in Durban in 2011. They finally had the ability to address possible points of contention, then to adjust, and finally compromise. The delegates were obviously hard at work in the days leading up to their submission deadline. They met late into the night negotiating a text that could be somewhat acceptable to all parties. After three long days, however, negotiators could not get past fundamental differences. This led to a half-worked upon text that countries decided they could not use as a starting point for negotiations at the next SBSTA in May, losing much of the progress they made this week.

What went wrong?

Even as progress was made in certain areas – with valuable contributions from many parties – other components were locked in complete standstill. There were fundamental disagreements that stalled the negotiations, such as:

  • Whether to only focus on adaptation and food security—which is of utmost importance to all, but especially vulnerable, developing countries—or to also address mitigation in agriculture
  • and whether there should be a call for developed countries to provide finance and other support for developing countries.

While the COP presidency strongly encouraged the Parties to reach an agreement and put pressure by offering clear deadlines, parties were unable to negotiate efficiently. It is clear that both significantly more time and efficiency will be required to achieve real progress on agriculture.

The silver lining

The issue of agriculture is complex and the fact that parties are offering texts as starting points for negotiations shows that future progress on agriculture may be closer than it looks:

  • There is even stronger urgency and desire for action. Negative impacts of climate change are being felt now for agriculture. Agricultural emissions are significantly contributing to the warming of our planet. Inaction will no longer be an option. This urgency will be made clear on Wednesday, November 16 at the Agriculture and Food Security Action Day during the second week of COP22.
  • Though it was difficult to reach agreement at this COP, countries are starting to acknowledge that many best agricultural practices have benefits for both adaptation and mitigation.
  • Countries are already implementing many good agricultural practices, which they have shared with each other at the UNFCCC and in other international fora. These practices can provide areas of common ground for the next negotiations.
  • Progress, even incremental and painstaking, is still progress. Text was proposed and discussed; valuable contributions and ideas were shared. Parties can take elements of this text, especially points of consensus, to the subsidiary meeting in May.

Of course, this is all dependent on the commitment and willingness to engage on agriculture – from all stakeholders. Countries must be willing to focus on common goals between all countries, and also to compromise where needed. EDF and our partners stand ready to provide support and share our experiences in agriculture in countries around the world to reach a decision on agriculture.

Posted in Agriculture, Marrakesh| Leave a comment
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