California Market at Three: All Grown Up and Thriving

This post was co-authored by Jonathan Camuzeaux and Derek Walker.

2960384757_155b4e2efa_zAs we pointed out in August, no news is good news when it comes to California’s cap-and-trade quarterly allowance auctions, which have been running effectively and without hiccups since November 2012. That’s right, last Tuesday’s auction marks the three-year anniversary of the program’s first auction, and the fifth time that California and the Canadian province of Quebec have conducted a joint auction. Time flies by when you settle into a routine, and another set of consistent, stable results indicates once again that California has a strong, well-functioning cap-and-trade program.

Steady results equal a healthy carbon market

Over 75 million current vintage allowances – which covered entities can use for compliance as early as this year – were offered at last Tuesday’s auction, and 100% of these allowances were purchased at a price of $12.73. This price, known as the settlement price, is 63 cents above the floor price set by the California Air Resources Board (CARB) for this auction, and is in line with previous auctions where allowances have cleared at prices slightly above the floor. In the advanced auction for 2018 vintage allowances – which can only be used starting in 2018 – over 10 million allowances were offered and 100% of these were purchased at a price of $12.65.

The absence of significant changes in results from one auction to the next is a positive sign that California has designed and implemented a well-functioning and mature carbon market, and that companies are integrating the requirements of the cap-and-trade regulation into their everyday business practices without difficulty. The high level of demand for future allowances also shows there is confidence in the program’s longevity and that forecasting of future compliance needs is being incorporated into many companies’ long-term planning.

California is paving the way for others

Other states and countries continue to keep an interested eye on California’s cap-and-trade program, in part because it has succeeded at cutting emissions while growing the state’s economy. This success is laying the groundwork and creating the momentum for the adoption of similar solutions elsewhere.

In fact, the idea of pricing carbon – through cap and trade or related mechanisms – is rapidly taking hold all around the world. Last week, Ontario released draft design options for a proposed cap and trade program that is scheduled to launch in 2017 and to link with the existing California-Quebec system in 2018. What’s more, almost half of the countries that have submitted emissions reductions pledges – called Intended Nationally Determined Contributions, or INDCs – have stated an interest in using market-based tools to meet their post-2020 commitments, according to an analysis by the U.N. Framework Convention on Climate Change (UNFCCC).

For many countries, California’s experience launching cap and trade and linking with Quebec to create the largest carbon market in North America provides an inspiring, real world example that can be studied, replicated and adapted elsewhere.

Image Source: Flickr

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