Market Forces

California Bucks Global Trend with another Year of GHG Reductions

This post was co-authored by Maureen Lackner and originally appeared on the EDF Talks Global Climate blog.

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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Capping Pollution from Coast to Coast

As the second auction in California’s landmark cap and trade program approaches, a coalition of states on the opposite side of the country – that have been cost-effectively reducing their carbon pollution while saving their consumers money – announced plans to strengthen their emission reduction goals.  Last week, the Regional Greenhouse Gas Initiative (RGGI) – the nation’s first cap and trade program which sets a cap on carbon dioxide pollution from the electric power sector in 9 Northeastern states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont) – released an updated Model Rule containing a number of improvements to the program, primarily a significantly lower (by 45%) overall cap, realigning it with current emissions levels.

Since the program took effect in 2009, emission reductions in the RGGI region have occurred faster and at lower cost than originally expected.  This has primarily been the result of increased electric generation from natural gas and renewables which have displaced more carbon-intensive sources like coal and oil, as well as investments in energy efficiency that lower overall electricity demand.  These reductions have been accompanied by lower electricity prices in the region (down 10% since the program began) and significant economic benefits:  a study from the Analysis Group estimated that electric consumers would save $1.1 billion on their bills over 10 years from the energy efficiency improvements funded by allowance revenue, and further, that these savings would generate over $1.6 billion in economic benefits for the region.

The new lower cap allows RGGI to secure the reductions already achieved, and push forward towards more ambitious pollution reduction goals.  The changes to the program are the result of a transparent and comprehensive program review process set in motion through RGGI’s original Memorandum of Understanding – a mechanism that is successfully fulfilling its original intention by allowing the states to evaluate results and make critical improvements.

While the changes will go a long way to fortify the program, there is room in the future for the RGGI states to look to California’s strong program design for additional enhancements.  For example, RGGI’s updated Model Rule creates a Cost Containment Reserve (CCR) – a fixed quantity of allowances which are made available for sale if allowance prices exceed predefined “trigger prices”.  A CCR is a smart design feature which provides additional flexibility and cost containment – however, RGGI’s CCR allowances are designed to be additional to the cap, rather than carved out from underneath it as in CA’s program (ensuring the overall emission reduction goals will be met).  California’s program has displayed enormous success already, with a strong showing in their first auction.

In the meantime, the RGGI states should be commended for their success thus far, and for their renewed leadership as they take important steps to strengthen the program.  These states have achieved significant reductions in emissions of heat-trapping pollutants at lower costs than originally projected, all while saving their citizens money and stimulating their economies, transitioning their power sector towards cleaner, safer generation sources, and laying a strong foundation for compliance with the Carbon Pollution Standards for power plants being developed under the Clean Air Act.  Such impressive achievements provide a powerful, concrete example of how to tackle harmful carbon pollution and capture the important co-benefits of doing so.

The bottom line is that cap and trade is alive and well on both coasts as the states continue to lead the charge on tackling climate change in the U.S. while delivering clear economic benefits.

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Australia’s landmark legislation will put price on carbon pollution, create world’s second-largest carbon-price system

By Jennifer Andreassen, originally posted on our Climate Talks blog.

As expected, Australia’s upper house of Parliament voted yesterday to adopt a carbon price, which will compel Australia’s largest polluters, beginning July 1, 2012, to pay for their carbon pollution.

Australia will have the largest carbon-price system in the world outside Europe's, after its upper house approved the Clean Energy Future package of bills Nov. 8. The package of bills aims to cut emissions from coal-dependent Australia 80% by 2050 from 2000 levels.

The legislation’s passage will give Australia, which has the highest per capita emissions of any developed country in the world and uses even more coal than the United States, the largest carbon-price system in the world outside of the European Union. (That is, the largest outside the EU until California’s program takes effect in January 2013; California last month approved the largest, first-ever economy-wide carbon market in North America, which could eventually link to other sub-national, national and regional markets around the world.)

EDF applauds Australia on its leadership on the vitally important problem of climate change. This vote is another indication that more and more countries around the world – with the U.S. being a notable exception – are taking climate change seriously. The legislation also backs Australia’s international commitment to reduce emissions by between 5 and 25 per cent by 2020 from 2000 levels.

The Clean Energy Future Package

The Clean Energy Future package is made up of 18 bills that will assign a price to carbon starting July 1, 2012 and cut Australia’s emissions 5% below 2000 levels by 2020 (though the target can be strengthened based on science or international action), and 80% below 2000 levels by 2050.

Australia’s 400-500 largest emitters will be covered by the carbon price, which will take the form of a fixed price (starting at A$23 per metric ton) for the first three years, and shift to a carbon market emissions trading system in 2015.

As we mentioned when Australia’s lower house passed the clean energy legislation on October 11, the Clean Energy Future package will shift Australia’s energy towards cleaner and renewable sources by:

  1. Placing a price on carbon.
  2. Creating a market-based system with plans to link it with ‘credible international carbon markets or emissions trading schemes in other countries’ – like New Zealand and Europe – after 2015.
  3. Giving a big boost to renewable energy research and development and deployment through a new $10 billion financing vehicle, the “Clean Energy Finance Corporation.”

(The Southern Cross Climate Coalition has some more details on the legislation in its analysis, as does Natural Resources Defense Council’s Jake Schmidt in his post Congrats Australia! Law passed which will require mandatory carbon pollution reductions for major polluters.)

Climate groups in Australia welcomed the passage of the laws, as did:

Australian Prime Minister Julia Gillard, who told reporters:

Today we have made history. … This is about what’s right for the nation’s future.

Deutsche Bank Australia carbon analyst Tim Jordan, who said:

This is a very positive step for the global effort on climate change. It shows that the world’s most emissions-intensive advanced economy is prepared to use a market mechanism to cut carbon emissions in a low-cost way.

CEO of The Climate Institute John Connor, who said:

This is a vital cog in Australia’s pollution reduction machinery with the potential to help cut around 1 billion tonnes of carbon pollution from the atmosphere between next year and 2020.

This vote means Australia now brings greater credibility going into international climate negotiations starting later this month in South Africa. It also puts wind in the sails of other jurisdictions about to introduce, or considering, emissions trading schemes which similarly price and limit carbon pollution.

The G20 Cannes Action Plan for Growth and Jobs even highlights the Australian legislation as an example of how members will “enhance competition and reduce distortions” in its plan to create “sustained, broad-based reforms to boost confidence, raise global output and create jobs.”

What’s next for Australia

Now, the Government moves into implementation mode, which means it will take to:

  • Establishing new institutions, including the Climate Change Authority (to recommend on future emissions targets); the Clean Energy Finance Corporation; and the Clean Energy Regulatory to oversee the market;
  • Finalizing contracts next year to close 2000 MW of brown coal power generation;
  • Working with New Zealand and EU officials on linking schemes after 2015.

Linkages to international carbon markets that are built into the system will also see Australia become a key player in the international offset market.

And Australian officials will be able to hold their heads high at the UN climate conference in Durban at the end of this year, as they promote their joint proposal with Norway for a roadmap to a 2015 global climate treaty.

Also posted in International, Politics / Leave a comment

Carbon trading grows up

Cross-posted from Reuters AlertNet.

When someone robs a bank, nobody challenges the legitimacy of banks. They suggest instead that the bank find better security. Why should carbon markets be any different?

Wednesday last week the European Commission (EC) discovered cyber thefts of carbon allowances valued at around €30 million from accounts in a handful of member states. It promptly halted all trading in its nearly €130 billion/year market until the holes could be plugged, accounts could be cleared, the stolen allowances could be traced by their unique identifying numbers, and culprits could be identified.

The fact that some trading registries are apparently less secure than your Facebook account is a clear problem and points to serious underinvestment in market infrastructure and security.

It certainly does not call into question, however, the idea of carbon trading, although some opponents of carbon markets have taken that step. These people range from outright climate deniers—those who can’t even admit we have a global warming problem—to those who believe that markets aren’t the most efficient way of addressing climate change, to those who can’t capitalize on the carbon market’s opportunities.

Let’s be clear: Putting a firm limit on carbon pollution, and providing polluters with flexibility in determining how to reduce pollution—including through transparent trading of pollution allowances—is fundamentally the best way to combat global warming pollution.

This basic fact is not changed by a €30 million theft of carbon credits that might have been prevented through a €10 thousand investment in security software and better computer hardware. Although not perfect, markets are the most rational and efficient way of allocating resources toward filling a specific need. Every stock exchange on the planet faces attempted cyber attacks, and most are well equipped to deal with them.

A day after the theft was discovered, the EC released a wholly separate, long-awaited decision to stop accepting pollution credits generated by destroying trifluoromethane, HFC-23, and nitrous oxide. Opponents of carbon markets seized on this announcement as further evidence that carbon trading markets aren’t working.

But actually, the EC’s decision to stop accepting these credits is the right move. HFC-23 was originally developed as an alternative to ozone-depleting chlorofluorocarbons. HFC-23 is a potent global warming gas, and destroying it helps the climate.

However, trading in HFC-23 credits creates perverse incentives. With a high enough price for carbon credits, it could make economic sense to build factories that produce HFC-23 for the sole purpose of destroying the gas and collecting credit for doing so. A better way for dealing with HFC-23 would be to subsume it under the successful Montreal Protocol, which is working to repair the hole in the ozone layer.

The coincidence of the EC’s decision to stop trading HFC-23 credits and the temporary suspension of trading on the heels of the carbon allowance theft, gave opponents of trading the opportunity to launch a two-pronged critique of carbon markets. But barring HFC-23 credits from entering the EU system can only be applauded—it’s entirely in the spirit of putting a firm upper limit on carbon pollution.

These two events highlight the carbon opportunity for the EC going forward. The emissions trading system has already proven its worth as the centerpiece of European efforts to cut global warming pollution. By improving the technical security of its trading program, the EC can assure investors that no more emissions allowances will be purloined.

And by closing its carbon market to credits from one-off HFC-23-type projects of dubious environmental value, and instead linking the EU market with jurisdictions that establish high-quality cap-and-trade systems, the EC can strengthen its own market and challenge others who are developing similar policies—from New Zealand to Tokyo to California, and beyond—to follow suit.

In the end, that’s all that counts—and the only thing the planet truly notices.

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First steps for the California carbon trading market

Whoever said cap and trade is dead hasn’t been paying attention to the news in California.

Recently, the first trade of a greenhouse gas emissions permit in the Golden State took place, signaling the beginning of what experts project to be a robust carbon market—and the largest in the U.S. given the absence of a nation-wide policy (note that the Regional Greenhouse Gas Initiative (RGGI), the first mandatory market-based effort in the U.S. with 10 participating Northeastern states, applies to utilities, while California’s program will also apply to industry and in later years, transportation).  The trade takes place hot on the heels of the defeat of Proposition 23 in the November elections.

Although the compliance market won’t launch until 2012, Barclays Bank and NRG Energy completed the first allowance trade:  a forward contract which guarantees the delivery of allowances valid for use in the California market at the start of the program at a locked-in price (around $11-$11.50 according to Point Carbon).  By helping provide certainty about the future, these types of trades allow firms to make smart business planning decisions, such as which energy technologies to invest in.  Experts at Barclays as well as at San Francisco-based CantorCO2 expect that other early trades are soon to follow, as firms look for ways to reduce risk and start transitioning to a clean energy economy.

Ensuring the integrity of the carbon market…

State regulators have been able to provide sufficient certainty about how the market will be structured and the timeline for regulatory action to allow for this early launch of the California market.  However, it will be important to nail down sooner rather than later the nitty-gritty specifics of how the market will be regulated in order to ensure that trading occurs in an efficient and transparent way (note that the California Air Resources Board (CARB) is currently accepting comments on a detailed rule proposal).

The financial crisis we just lived through should provide ample incentive for us to make sure to get the rules right and for ensuring tough enforcement and strong oversight — for example, by requiring all carbon trading to be done on registered exchanges, rather than over the counter.  On that point, it’s worth noting that the recently passed Dodd-Frank Financial Reform legislation requires the Commodities Futures Trading Commission (CFTC) to lead an interagency study on how best to regulate the carbon market.  (Carl Royal’s 2009 testimony from the House Energy & Commerce Committee hearing on the American Clean Energy and Security Act and our own fact sheet provide some more arguments).

The path forward for CA

California’s cap-and-trade program will cover the power and industrial sectors starting in 2012 and the transportation sector (including cars and fuels) beginning in 2015.  Time and time again, California and other regional initiatives, like RGGI, continue to lead the nation on sensible energy and climate policy (and stay tuned for developments in the Western Climate Initiative (WCI) as well as New Mexico).  Time for Washington to catch up.

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CCX, RIP—or is it “good riddance”?

Chicago Mercantile ExchangeThe Chicago Climate Exchange, one of the first voluntary cap-and-trade programs, is shutting down next month. That’s bad news for the planet, isn’t it? Just take a look at today’s Wall Street Journal editorial page for an apparent confirmation. There the news is being celebrated as “cap and retreat.” Check.

That should indeed be confirmation enough. Sadly, what’s good for the Journal tends to be bad for the planet. Here that may not hold, although it’s not for the reasons the Journal thinks.

One among many

The full editorial is behind a firewall. That’s just as well. The rest is as wrong as the beginning. Let’s start with the only direct quote. The Journal opinionators say the CCX advertised itself as “North America’s only cap and trade system for greenhouse gasses.” In fact, CCX’s own webpage says it’s “North America’s only cap and trade system for all six greenhouse gases.” That makes all the difference.

Carbon dioxide, the main greenhouse gas, is or will be covered in at least 15 states. RGGI covers 10 Northeastern states with its carbon cap, and Californians just reaffirmed with a clear vote of 60 to 40 to put in place theirs (which also covers all six greenhouse gases). New Mexico has announced similar plans.

Volunteerism won’t do

There’s also a much larger point here. The CCX was voluntary. Companies volunteered to sign up. It doesn’t take a Ph.D. in economics to realize that the only companies who sign up for reasons other than marketing purposes are the ones that have allowances to sell. Those that need to buy them, stay as far away as possible.

No market can operate under these conditions. If anything, it’s surprising the market held up as long as it did—no doubt due to companies’ willingness to write off their participation as a marketing expense. Why else would the price for a ton of emissions ever be much above zero?

Thanks for the memories

CCX did provide some valuable lessons for participants. Chief among them, how to implement such a trading system internally, how to minimize emissions and make money, and whether and how it would be different from SO2 trading, something many CCX participants did successfully for over a decade.

But CCX was never meant to be anything other than a precursor for a U.S.-wide system.

The same, of course, goes for most state-wide initiatives. New Mexico’s plans will put the state ahead of most others in the U.S., but Santa Fe alone will not prevent China from pulling farther ahead of the U.S. in generating sustainable jobs, or decrease the billions we send to the Middle East every year.

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