Stakeholders in both of North America’s carbon markets should rest up this holiday season, because they have a busy year ahead.
While regulators in RGGI and WCI are likely to be occupied with preparing to comply with the EPA’s Clean Power Plan, which takes effect at the start of 2022, there will also be compliance and regulatory challenges facing participants in both systems.
The nine US states that make up RGGI have also begun a second programme review that may lead to changes from 2018, when the fourth control period begins, while California’s market will see the transportation fuel and natural gas distribution sectors, which joined this scheme this year, face their first compliance deadline in November.
The CPP requires states to cut emissions by an overall 32% below 2005 levels by 2030, but it gives them flexibility as to how they meet those targets, for example by establishing regulatory standards or by setting up cap-and-trade systems.
All states are required to either submit a plan or request an extension by next summer.
RGGI’s model comes closest to meeting the CPP’s specifications of a mass-based trading system, said Jordan Stutt of the Acadia Center, a non-profit environmental advocacy group.
“The CPP in its final version was altered in many ways to accommodate a RGGI-like programme. In terms of what RGGI states have to do to comply, it’s not a big list, … which is why we’re now seeing so many states express interest in [it].”
RGGI’s current rules will need a few tweaks to bring them into line with the EPA’s model rule, such as the timetable of its trading phases, however the changes are not significant since both the CPP and RGGI are utility-only regulations, Stutt said.
RGGI’s fourth phase would need to be extended from 2018 to 2021 instead of 2020, with the fifth period then beginning at the same time as the CPP in 2022.
RGGI also allows installations to use carbon offsets to meet a limited portion of their annual compliance requirement, while the CPP doesn’t, though this might not present an insurmountable problem, Stutt said.
“If the RGGI states wanted to continue to keep offsets available, they would have to ensure the cap levels they used are lower than the CPP targets by a quantity equal to the maximum allowable number of offsets.”
Equally, RGGI may need to change the rules regarding its Cost Containment Reserve, which injects additional permits into the market when a threshold price is reached in its quarterly auctions. The Acadia Center has already called for reform of the CCR as the trigger price has been breached twice even as emissions have fallen.
“To solve this problem, the CCR will have to either be eliminated or restructured with higher trigger prices and allowances that are drawn from beneath the cap,” Stutt said.
In terms of trading activity in RGGI, there are few surprises expected in 2016.
The CCR was depleted in the third auction held in 2015, but analysts and traders say there’s a good chance that the trigger price might be reached sooner in 2016.
“Everybody is waiting to see how soon the CCR gets completely depleted,” said Thomson Reuters Point Carbon analyst Tom Marcello.
The weather may also play a key role in RGGI’s price evolution in the new year, according to a New York-based broker.
“If we get a really mild winter, that could be a wet blanket on the market,” he said. “I could see the first auction failing to sell. If oil, power and natural gas are falling, why shouldn’t carbon?”
Details on any reform plans for RGGI could also affect prices, particularly if states move to further reduce the allowance surplus.
“If they make major adjustments like they did the last time, the market will react,” he said, referring to a decision by RGGI’s regulators last year to cut the cap by 45%.
RGGI states reported total emissions of 265 million short tons in the system’s second phase from 2012 to 2014, compared with a cap of 248 million. However, the market remains inundated by a supply glut in excess of 130 million allowances.
RGGI’s 2015 vintage allowance prices settled at $7.37 on Friday, down 1.6% from a week ago but up around $2 or nearly 40% from the end of 2014.
Meanwhile, California’s regulator, the Air Resources Board, is also considering how it can apply its economy-wide market to the utility-only CPP, a task that’s expected to be trickier than for RGGI.
“At a bare minimum (California) has to extend the regulation post-2020 to 2030. The EPA likes the idea of states utilizing emissions trading schemes … I think they will do what they can to make California’s program work with as little amendments as possible,” said Jackie Cooley, an analyst at ICIS-Tschach.
She said one possibility could be California effectively partitioning the market by creating a new set of allowances that could only be used by the power sector.
“Not only would this make demonstrating compliance more simple, but we believe this would also make linkages with others states more straightforward. However, we don’t think this is necessarily the number one pathway ARB is looking into.”
Separately, one of the WCI’s highlights for 2016 will likely come with November’s compliance deadline, when the transport and natural gas sectors, the addition of which has more than doubled the size of the scheme’s cap, need to surrender units covering 30% of their 2015 emissions.
Another would be a decision on whether to allow international forestry offsets in the scheme. ARB has proposed to allow the limited use of so-called REDD credits from 2018, the start of the WCI’s third phase.
WCI, which currently comprises California and Quebec but soon also Ontario and Manitoba, reported an overallocation in its first phase of 2013-2014.
Entities in the California market reported emissions of 291.1 million metric tonnes, some 34.5 million below the cap, while Quebec saw emissions at 36.6 million, nearly 10 million tonnes below the two-year cap of 46.4 million.
Chandan Kumar, an economist at CaliforniaCarbon.info, predicted California allowance prices won’t move much more than they did in 2015, staying near the 2016 auction floor price of $12.73. However, he said there might be a price surge ahead of the deadline as installations scramble to pick up last-minute units.
CCA prices started 2015 at $13.00, but they’ve slipped to $12.81 amid a lack of volatility that Kumar said reflects the fact that this market is also oversupplied, potentially out to 2021.
California auctions were modestly oversubscribed in 2015, with an average cover ratio of 1.18 over the last four sales.
Point Carbon’s Marcello predicts that ratio may fall to 1 or below by late 2016, especially if REDD offsets begin to flow into the market.
“A lot of stakeholders are interested because it could bring a lot more offset supply and loosen the market up,” he said. WCI participants can currently use offsets against 8% of their annual emissions.
A third factor that could also impact is a growing reluctance of neighbouring states to sell renewable power into California, as they look ahead to their own CPP compliance, Kumar said.
This could place increased pressure on fossil fuel power plants within the state to operate at higher rates, thereby increasing their emissions and so the demand for CCAs.
By Alessandro Vitelli – firstname.lastname@example.org