July 13, 2017 by Ronjoy Bezbarua
This report was updated on July 14, 2017 to include more in-depth analysis on the price impacts of AB398 and other scenarios for offset limits.
With discussion around California’s cap-and-trade outlook post-2020 ongoing, this report has been compiled to provide an impact analysis of AB398 on California Carbon Allowance (CCA) prices through 2030. The latest extension proposal recommends several adjustments to the current program regarding the future supply of allowances, adjustments to the Allowance Price Containment Reserve (APCR), and revisions to the use of carbon offsets with a prioritization of California in-state offsets that provide direct air and water quality benefits.
For our analysis, we build on the existing Western Climate Initiative (WCI) carbon price forecast produced by CaliforniaCarbon.info which forecasts allowance demand based on fossil fuel consumption in the WCI carbon markets. This analysis works on the new mechanism for APCR reserves and builds scenarios to compare the impacts of reducing offset quotas and restricting the use of our-of-state offset credits.
Analysis within this report suggests that the supply of in-state offsets would at maximum meet no more than 0.4% of the total projected compliance offset demand between 2021 to 2030. Over the six scenarios modelled under various provisions for the use of offsets by capped Californian entities, the entirety of allowances contained within the first two APCR tiers, recommended in the new bill, will be exhausted by the latter half of the decade. The report concludes that a decreased offset usage limit and in-state offset requirements heavily increase the reliance on the price ceiling reserve. The overall result is a significant increase in the cost of compliance by $8.68/ton on average due to the restrictions on offsets as a least-cost compliance measure.
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