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This blog was co-authored by Delia Novak, Western States Climate Policy Intern, U.S. Region
Results of the latest Western Climate Initiative auction were released today, and while the solid demand for allowances indicates a stable market, there are hints of uncertainty about next steps for the cap-and-trade program. Now that the California Air Resources Board has a new Climate Change Scoping Plan in place, the state has key opportunities this year to strengthen this marquee climate program and to consider joining forces with other states.
February auction results
- All 56,395,720 current vintage allowances offered for sale were purchased, resulting in the tenth consecutive sold out auction. This is about 1.6 million fewer allowances than were offered in the November 2022 auction.
- The current auction settled at $27.85, $5.64 above the $22.21 floor price and $1.05 above the November settlement price of $26.80. This is the first auction with this new, higher minimum sale price.
- All of the 7,577,000 future vintage allowances offered for sale were purchased; these allowances can be used for compliance beginning in 2026. This is about 360,000 allowances fewer than were offered at the previous auction.
- Future vintage allowances settled at $27.01, $4.80 above the $22.21 floor price and $1.01 above the November settlement price of $26.00.
- This auction generated about $980 million for California Climate Investments. This comes at a critical time for the state as California faces a potential budget deficit and cuts to essential programs to reduce air pollution and environmental burdens in local communities.
What factors may be at play with these results?
These results are solid, but it is worth noting even with fewer allowances offered for sale there was no record price. The results also show that fewer market investors participated in this quarter’s auction. This slightly weaker demand for allowances could indicate some potential uncertainty in the market. It’s possible this stems from broader economic uncertainty — inflation is still high across the United States and much of the world, and nagging concerns persist about a recession. This could be causing market participants to take a “wait and see” approach to purchasing allowances.
It is also possible that market participants are eager to understand more what the next steps for California’s cap-and-trade program look like. Specifically, in the publication of the Scoping Plan, the California Air Resources Board committed to evaluating the stringency of the emissions cap to meet the new 2030 goal, among other potential program updates. This forthcoming rulemaking opens key opportunities to strengthen the cap and trade program to ensure the emissions cap is an effective backstop and provides certainty that California can meet its new, more ambitious 2030 goal of achieving 48% reductions below the 1990 level, as outlined in the new Scoping Plan. To both minimize potential uncertainty for market participants, and ensure the state is on track as soon as possible to achieve these reductions, CARB should undertake this rule-making swiftly so new rules can go into effect as soon as 2024.
Opportunities to strengthen the cap-and-trade program
California’s cap-and-trade program has served as a critical backstop in achieving California’s climate goals for the past decade, including achieving its 2020 goal four years ahead of schedule. With an important rulemaking on the program coming up this year, there are three key areas for strengthening the program that CARB should consider and will help increase the state’s ambition in line with the 2030 goal.
- CARB should evaluate the stringency of the cap and consider tightening it to ensure the cap aligns with the 48% by 2030 goal. California’s new legislative goal set a target for the state to reach net-zero greenhouse gas emissions and reduce emissions 85% below the 1990 level by 2045. But in order to get the state on track to meet those deep reduction goals, the Scoping Plan indicates that California needs to exceed the statutory 2030 goal of 40% below the 1990 level and instead achieve 48% reductions below that same level. As such, CARB needs to recalibrate the overall emissions cap to ensure it will continue to act as an effective backstop and deliver on this increased near-term ambition.
- This rulemaking offers the opportunity for CARB to ensure that cap and trade is contributing to improvements in local air quality. CARB should consider establishing facility-level caps in highly impacted communities, as recommended by the Environmental Justice Advisory Committee and the Independent Emissions Market Advisory Committee. While cap-and-trade is designed to address global climate pollutants, not local health-harming air pollutants, certain facility-specific emission limits could both help to increase our climate ambition and address the disproportionate environmental burden experienced in many California communities.
- CARB should consider adding an Emissions Containment Reserve (ECR), a design feature for cap-and-trade programs which ensures that, when demand for emissions allowances decreases and hits a predetermined trigger price, the overall supply of allowances is reduced. The amount of allowances eligible to be removed from the overall supply in the case of reduced demand is relatively small (typically under 10%, as is the case in the multi-state Regional Greenhouse Gas Reduction Initiative, or RGGI, on the east coast). By reducing the supply of allowances when the trigger price is reached, an ECR translates lower demand and lower prices into greater climate ambition. As California seeks to strengthen the cap-and-trade program to meet its new, more ambitious climate targets, an ECR is an important tool to consider to further advance the program.
Strengthen… but also think about expansion and extension
While increasing the ambition in the cap-and-trade program to ensure California meets the new 2030 goal is essential, CARB should also start thinking about how to increase our climate cooperation with other states, such as Washington, and the role of cap-and-trade in meeting our even-more-ambitious 2045 climate goals.
Our climate allies in the Evergreen State have created a cap-and-invest program that is designed specifically to align with California and Quebec’s existing programs under the Western Climate Initiative. Washington officially launches its new program next week with their first allowance auction. Joining forces with Washington would create a larger, more efficient market for emissions reductions and provide greater incentives for companies to invest in clean technologies and practices. It would also help to ensure that emissions reductions are achieved at the lowest cost possible, maximizing the benefits to both states. In the upcoming rulemaking, CARB should prioritize linking with Washington’s program as soon as possible to maximize the benefits for participating entities and to accelerate reductions in climate pollution across the board.
Last but not least, CARB should also consider the need to plan for the cap-and-trade program after 2030. For over 10 years now, the cap-and-trade program has acted as a critical backstop in California, working alongside a suite of other clean energy and climate policies to ensure that the state meets – or exceeds – its climate targets. It acts as a kind of insurance policy; if California’s other policies fall short of their goals, the declining economy-wide limit on emissions will guarantee that the necessary reductions are still achieved. In order to ensure that California gets and stays on track to meet our 2045 goals, the state needs the emissions cap continuing to act as that backstop. But both policymakers and regulated entities need to be able to start planning now for climate action in the next decade.
Taken together, these steps can significantly enhance California’s cap-and-trade program and accelerate progress towards a less carbon-intensive and more equitable economy. By increasing the ambition of the program, exploring linkage with Washington state, and planning for the program out to 2045, California can ensure that the state is well-equipped to secure the strongest future possible for its communities and continue its role as a global climate leader.