BREAKING: Extreme reform proposed by latest Senate Bill

May 2, 2017 by Billy Hamshaw

(CaliforniaCarbon.info, May 2, 2017)

With Senate President Kevin de León by his side, Senator Bob Wieckowski announced yesterday a proposal to completely overhaul The California Air Resources Board’s current cap-and-trade program with a new look ‘cap-and-trade with a collar’ program.

SB 775, the latest in a string of bills proposed to reform the current program post 2020, is the most extreme yet. Functioning more like a tax, the regulation would instill a price floor and ceiling at quarterly auctions with annual compliance obligations as opposed to three year periods. The bill would also do away with free allowances and carbon offsets. To counteract inflated energy and power prices, lawmakers have proposed a ‘climate dividend’, refunding end consumers.

Appealing to those that believe that the current program has not done enough to significantly reduce California’s emission levels, the bill promises to undo the years of work undertaken by ARB in designing the current system, one that adopts a longer term mindset to reducing emissions in a more cost effective manner.

At present a large surplus of allowances in the market has maintained prices around the floor, deemed by some policymakers too low to drive meaningful reductions. With a diminishing cap of allowances, however, CaliforniaCarbon.info have projected allowance prices to significantly rise from the floor price from 2025 onwards as the cumulative surplus of allowances becomes a cumulative shortage. Fearful of an inflated price, compliance entities would be expected to make abatement decisions based on their specific requirements, thus allowing the market to find the lowest possible point of mitigation. These measures have been craftily designed to reduce the impact of carbon pricing on California’s economy as well as energy consumers.

In addition, ARB’s successful offset program has been a key policy for national conservation efforts, generating important revenue streams for native tribes as well incentivizing agricultural methane reductions – a key contributor to overall emission levels. How these uncapped sectors will benefit from Wieckowski’s latest bill remains unclear.

Disheartened by the low turnouts at recent auctions, de León addressed the need for market stability and a reliable source of revenue from the program post-2020 in the address from the state capitol yesterday. Ironically the market reacted strongly to the announcement, falling USD 0.10 on the current front contract as participants started selling off banked allowances.

The sell off allowances is hardly surprising considering that as of January 1, 2021, any previous vintage allowances would be worthless. Should SB 775 be written into law and the new program adopted, we would anticipate the market to progress towards a zero-balance scenario with entities holding enough allowances to cover their compliance obligations only.

Ontario’s carbon market also felt the blow yesterday, dropping by CAD 0.09 to CAD 19.45 (USD 14.24 based on yesterday’s exchange rate). With even more stringent linking measures, the new bill would likely make California’s carbon market an unattractive partner for many jurisdictions.

With much still to discuss, SB 775 will have its first hearing before the Senate next week. As assembly members, senators and ARB staff members continue to provide options for cap-and-trade post 2020, CaliforniaCarbon.info will be providing the latest policy insights and market impact analyses as and when developments occur.

Billy Hamshaw (billy@californiacarbon.info)

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