As the Saying Goes, No News is Good News

rp_KHK-picture-200x300.jpgEvery year at your annual checkup, the doctor measures your blood pressure, listens to your heart, and asks you to take deep breathes while moving around her stethoscope. Through these tests, your doctor is gaining insight into your overall physical health and monitoring for anything unusual. Typically, no news is good news when it comes to this annual physical. The same goes for California’s cap-and-trade carbon market, which has been up and running smoothly for the past two and a half years.

Instead of annual check-ups, California’s cap-and-trade program has quarterly auctions – the results of which tell us a lot about the health of the overall program and the progress the state has made towards its greenhouse gas reduction targets. Consistent and stable results from one auction to the next are a positive indication that the state has a functioning, well-oiled program. In other words, no news is good news.

Last Tuesday, the California Air Resources Board (CARB), in partnership with the environmental ministry of the Canadian Province of Quebec (MDDELCC), held one such quarterly auction for cap-and-trade carbon allowances, during which individuals and companies had the opportunity to bid for a total of approximately 83.9 million allowances. Today, CARB and MDDELCC released the results and they reveal yet another successful sale of allowances to the market. The level of bidding and the healthy demand for allowances offered in this auction were very similar to what we’ve seen at the last few auctions: 100 percent of 2015 vintage allowances offered to the market in this auction were purchase at a price of $12.52, only 23 cents more than the price at the last auction in May. The price of 2018 vintage allowances, which are not available for use until 2018, is also consistent with the previous auction – 100 percent of these allowances were purchased at a price of $12.30. Demand for these allowances did increase as compared to last auction, likely due to the increasing calls for longer term greenhouse gas reduction targets from businesses across the state and from the California State Legislature. California and Quebec companies continue to receive more and more reasons to begin planning their future compliance strategies as it becomes clearer that California’s climate policies are here to stay.

The level of price, bidding, and demand at these quarterly auctions are positive measures of the overall health of the state’s carbon market. Stability in price and continued healthy demand is an indication that regulated companies in California and Quebec are well educated about what they must do to comply with the program and have compliance plans in place that will allow the state to meet the economy-wide cap set forth by AB 32, California’s greenhouse gas reduction law. Price stability is extremely important for companies that need to plan ahead and make decisions about long term investments in their business operations. Giving companies the time to plan their compliance strategies will make the program more cost efficient, allowing the state to achieve the necessary emissions reductions at the least cost possible.

As the program moves steadily forward towards meeting the state’s 2020 emissions reduction target, it will be vital for businesses to receive further certainty about the state’s longer term greenhouse gas reduction goals. These goals are the subject of several bills being considered right now in the California State Legislature. SB 32 (Pavley), for example, would place into state law targets currently set through executive orders to reduce greenhouse gas emissions 40 percent below 1990 levels by 2030 and 80 percent by 2050. California has demonstrated that it can maintain impressive economic growth while meeting the most ambitious climate targets in the nation. The earlier business can get certainty about future climate regulation, the more opportunities they will have to continue this impressive trend and the more positive results we’ll see at these quarterly checkups.

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