The announcement of arguably the world’s most ambitious climate target has failed to ignite California’s carbon market as doubts linger about whether lawmakers intended to use the cap-and-trade system to help meet the goal.
California carbon prices barely budged following Governor Jerry Brown’s announcement of a 2030 goal of -40%, as traders await more clarity over the future of the market, which they added is needed to encourage enough buying to lift prices from their effective floor price levels near $12.
CCAs for December delivery settled Friday at $12.70 on ICE, one cent up week-on-week with 1.5 million units changing hands on Friday – the first ICE screen trades made since the Governor’s announcement early on Wednesday.
The 2030 target was at the higher end of expectations but market watchers said it offered no immediate incentive to buy CCAs without further details on how the state plans to meet the goal.
“There’s no guarantee they’re going to continue this programme through 2030,” Mason Henderson of carbon trading and brokerage firm ClimeCo said at the Navigating the American Carbon World conference in Los Angeles last week.
“It may have decreased volume in the market because people just don’t know … I think that it just makes us bounce along the floor more,” he said, referring to the auction reserve floor price currently at $12.10 that CCAs have closely tracked for the past 20 months.
He added that with the price already near that floor, no trader will sell short in anticipation of the eventual discontinuation of the programme, leaving prices wedged at current levels.
POLICY MIX
Governor Brown gave no further details about how the goal would be met beyond 2020. His adviser Ken Alex later told delegates at the conference the administration had the authority to deploy policies to get to the -40% goal but may need additional guidance from lawmakers.
On the day of Brown’s announcement, two bills that would help achieve the goal were approved by the California Senate’s Environmental Quality Committee, a preliminary step to becoming law.
Bill SB32 would authorise the California Air Resources Board to set greenhouse gas targets for 2030, 2040 and 2050, while SB350 would give it a mandate to set a 50% renewable portfolio standard, halve petroleum use and double the current energy efficiency of buildings by 2030.
However, neither measure expressly refers to cap-and-trade, leaving observers to speculate over the fate of the market.
“That’s the big uncertainty now. It’s a bold move, but I’m not sure how we’re actually going go down that road and how much of it is going to rely on cap-and-trade,” said Severin Borenstein of the Energy and Climate Institute at University of California, Berkeley.
“It’s enough of a stretch goal that if it gets loaded significantly onto the cap-and-trade market, we could see prices rise (before 2020) … If we’re going to rely much more on cap-and-trade, we’re going to need a higher price because $12 isn’t going to do it.”
Borenstein refered to a study by his institute last year that found there was considerable abatement without any carbon price in California due to complementary policies such as vehicle fuel and renewable energy standards.
While the cap-and-trade system acts as a ‘backstop’ to these policies, California has linked the market to Quebec’s, with Ontario planning to follow suit. The state has also been in talks to establish market connections at some level with its west coast neighbours Oregon, Washington and British Colombia, as well as Mexico, China and several of its provinces.
ESTABLISHED MEANS
Nicholas van Aelstyn of law firm Beveridge and Diamond, which has clients that are regulated under California cap-and-trade, said it was precisely the market’s current ineffectiveness that might help secure its future.
“I think there’s a very high probability the market will continue post-2020. You don’t hear the virulent opposition that you used to … in part because it seems to be working because the price isn’t so terribly high,” he said.
“Let’s not forget this has become a significant revenue stream for the government. Even those who might be ideologically opposed to it, they won’t be so outspoken because the government needs this revenue stream.”
February’s CCA auction raised over $1 billion, by far the most to date, in the first sale since the market more-than-doubled in size in January to cover distributors of transportation fuels.
But Borenstein was less sure that lawmakers would be willing to continue with cap-and-trade, despite the policy achieving emission reductions at lower overall cost than more hidden carbon prices resulting from a slew of additional regulations.
“Complementary policies are in many ways more politically acceptable than a carbon price of, say, $40, which I think a lot of people would consider a horrible outcome,” he said.
LACKING VOLUME
The benchmark front-year CCAs notched a 7 cent gain through April but are still well below the 2015 settlement high of $13.14, which was reached on Jan. 7 – just days after the scheme’s expansion.
Early speculation that the expansion would drive prices proved short-lived, though monthly ICE trading volumes in both March and April have been well above January’s 1.6 million.
Several market participants at the conference were concerned that many smaller regulated emitters had not managed their requirements for the first compliance period (2013-2014) and faced higher costs to buy CCAs ahead of the Nov. 1 true-up period.
“Keep an eye out for September, October, as everyone has to comply for the first phase,” said ClimeCo’s Henderson.
“Every company has done the same thing, everyone likes to procrastinate. If you put it off does the market go crazy?”
By Ben Garside – ben@carbon-pulse.com
