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

Co-authored by Erica Morehouse and Jonathan Camuzeaux (this post was originally posted in EDF Talks Global Climate).

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 2030target 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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