July 21, 2017 by Billy Hamshaw
(CaliforniaCarbon.info, July 21, 2017) Annnnnd breathe. Well what a show-down its been. The past 6 months has seen a number of plans and proposals have their time in the limelight as Assembly members and staff chipped in their two-cents worth to extend and amend the state’s hallmark carbon pricing initiative and cap overall emission levels.
With the sun setting on a number of a bills debated and passed around Sacramento, AB398 emerged the winner on Monday, gaining bipartisan support in both the Assembly and Senate. Discussions over its design are set to continue, however. Whilst AB398 provides greater over-arching legislation than seen previously, the bill has left much detail to be fleshed out by the regulators, The Air Resources Board (ARB).
Prices soar to new heights
The positive news for many market proponents is that allowances purchased from previous auctions will be fit for future compliance obligations beyond 2020. The security of a two-thirds vote passed adds further legal certainty to the program which remains largely unchanged. Rising in anticipation of the vote, CCA prices hit new levels on Tuesday. The current front contract (July 17) closed at USD 15.30, almost a dollar more than next year’s anticipated price floor and nearer 2019’s expected floor price.
Raising the bar
Going above and beyond previous objectives, SB32 which was written into law last year set out the state’s most ambitious targets yet – to reduce GHG emissions to 40% below 1990 levels by 2030. Criticisms over core design principles of ARB’s current program have flooded the debate around post-2020 policy design.
One of the most widely criticized aspects of the program has been the glut of unsold allowances. At present annual demands of allowances have fallen well short of those on offer at quarterly auctions. Whilst this trend is not expected to continue with a declining cap and emissions poised to continue on their current trajectory, there remains a large pool of unsold allowances that promise to re-enter the market should two consecutive auctions clear. After the program’s last auction in May, CaliforniaCarbon.info anticipates a total surplus of over 14 million. This surplus has previously kept CCA prices at the floor – a range too low to drive meaningful reductions in the eyes of some.
It is understood that the bill will seek to address this pre-2020 surplus, tightening the cap and maintaining steady state revenues from well attended auctions. How these adjustments will be made however, joins ARB’s mounting to-do list.
Other groups across the state have argued that not enough emission reductions were happening at the local level, particularly within disadvantaged communities. With previous efforts that attempted to link California’s carbon programme with local criterion pollutants failing to garner support, a separate bill was passed through with AB398 mandating direct regulations for criterion pollutants.
The new golden offset
Dampened offset usages and prioritised use of domestic offsets saw Environmental Justice groups make their mark on the bill. As of 2021, a 4% offset limit will be set. No more than one half (i.e. 2% max) may come from offsets that provide benefits out of state. The limit is raised to 6% after 2025 with the same out-of-state restrictions. Exactly which offset types will be approved as providing direct benefits to California remains a question to be resolved by the ARB.
Based on the numbers listed with the registries, California’s offset supply is expected to be well short of future demand. This raises interesting questions over offset prices, with Californian offsets likely to carry a premium. Canadian entities may also be beneficiaries of this new legislation with wider availability of offsets from other states.
Concerns over the legality of discriminating between inter-state offsets have also been raised by legal professions, with particular regard to competition law (link).
Cost-containment is an underlying principle of any flourishing carbon market and a key pillar of AB398. Within the current program, a finite pool of allowances known as the Allowance Price Containment Reserve (APCR) was established to alleviate demand if certain price signals were triggered. Under the new legislation, it is understood that allowances from this pool are expected to be allocated to intermediary price steps or ‘speed bumps’. Should this supply be exhausted and prices reach a set ceiling (likely in the range of USD 60), allowances would be released beyond the cap to satisfy demand until prices are eased. It is understood offsets could play a secondary role, purchased in lure of the allowances sold at the ceiling. Again clarity over this mechanism will likely ensue during transparent ARB discussions.
Analysis by CaliforniaCarbon.info has suggested that the decreased offset usage limit and in-state offset requirements will place a heavy burden on the price ceiling reserve. Overall, the market might expect to see a significant increase in the cost of compliance through 2030.
For a deeper dive into the market dynamics and forecasted price scenarios under AB398, join the CalfiorniaCarbon.info team on Weds July 26 for California’s Carbon Outlook: Understanding the implications of AB398
During this online webinar, CC.info analysts will be presenting findings from their latest report, An Impact Analysis of AB398 on California’s Cap-and-Trade Market. Guest Speaker Jon Costantino will also be joining the discussion to provide expert insights on the newest bill and its next steps.
The event is free for all paid subscribers and USD 150 for guest attendees. To register for the event or to speak to an organiser, please email firstname.lastname@example.org
Billy Hamshaw (email@example.com)
Secondary Market Digest – February 2018
March 9, 2018
Regulatory Round-up: Cap-and-trade uncertainty in Ontario looms due to gene...
February 21, 2018
Secondary Market Digest – January 2018
February 9, 2018