Climate Solutions Group

California Cap and Trade Extension Bolsters Carbon Markets

Jerry Brown and cap and trade

20

Jul 2017

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On July 17th, the California Senate and Assembly passed AB 398 with bipartisan support that extends the cap and trade system until 2030. This is good news for those participating in Ontario and Quebec carbon markets as the Bill notes in section 1(c)

“action taken by California to reduce emissions of greenhouse gases will have far-reaching effects by encouraging other states, the federal government, and other countries to act”.

There is now regulatory certainty that the Western Climate Initiative (WCI) carbon market, which Ontario plans to join next year in 2018, will continue to at least 2030.

What are the major changes?

AB 398 not only extends cap and trade but makes some notable changes to the existing program. Some of the design features of the Bill include the following:

  • Specified price ceilings for emission allowances; this will help to avoid adverse impacts on the economy through limiting emission allowance price increases. [Section 38562 (2)(A)]
  • Price containment points; when the emission allowance price reaches a certain point, an extra supply of emission allowances will enter the market which is derived from the allowance price containment reserve. As the name suggests, this will help to “contain” prices by prevent a short supply from increasing prices. [Section 38562 (2)(B)]
  • Offset credit compliance limits; from the start of 2021 to the end of 2025, regulated emitters can cover up to 4% of their compliance obligations with offsets (down from 8%), half of which must have direct environmental benefits in state. From the start of 2026 to 2030, the 4% limit increases to 6% and maintains the requirement that half of the offsets are sourced in state. [Section 38562 (2)(E)]
  • Establishment of a Compliance Offsets Protocol Task Force; which will be responsible for providing guidance on approving new offset protocols that reduce emissions, and provide direct environmental benefits while prioritizing disadvantage communities, Native American or tribal lands, and rural and agricultural regions [Section 38562 (2)(F)]. This means that the economy may be provided with a broader range of activities that can produce offsets.
  • Industry assistance factors for allowance allocation; these factors will be applied at a declining rate resulting in a 40% reduction in free allocation by 2030 [Legislative Council’s Digest Section (1)]

Affect in Ontario, Carbon Markets, and Offsets

The market has already responded to the anticipation and passing of AB 398. California Carbon Info reports that emission allowances are now trading at $0.42 USD higher than they were before AB 398 was proposed. The Ontario benchmark price for emission allowances is now at $20.09 CAD which is a significant increase from the last auction settlement price of $18.72. The Ontario auction and California-Quebec joint auction for emission allowances will be interesting to follow. Now that the cap and trade system is firmly set in place, the next contentious issue might be on governments decision on how revenues from these auctions is spent.

Overall, it is expected that AB 398 will support climate action across North America, including offset development. An impact analysis conducted by the American Carbon Registry and California Carbon Info suggests that the supply of offsets currently available to California emitters will satisfy just 0.4% of demand between 2021 and 2030. That means there is a large opportunity for offset project development despite the new decreased limit in offset credit compliance from 8% to 4% (6% from 2026 to 2030).

Conclusion

The fact that this bill passed is testament to the hard work done by the California government to consider and weigh the wildly different values and needs of impacted stakeholders. To move forward and fight climate change, compromises must be made. Hopefully California can be a model for the rest of the United States and the world. Here in Ontario, carbon markets will only be bolstered by the California legislation.

Photo Courtesy of California Air Resources Board

References

AB-398 California Global Warming Solutions Act of 2006: market-based compliance mechanisms: fire prevention fees: sales and use tax manufacturing exemption.(2017-2018) Retrieved from: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB398

American Carbon Registry & California Carbon Info (2017) An Impact Analysis of AB398 on California’s Cap-and-Trade Market. Retrieved from: http://californiacarbon.info/wp-content/uploads/2017/07/AB398-_Impact_Analysis.pdf

Climate Hawks Vote (2017) California: Broad Coalition of Environmental Justice, Climate Groups Oppose Cap and Trade Bill. Retrieved from: http://climatehawksvote.com/news/press-releases/california-broad-coalition-environmental-justice-climate-groups-oppose-cap-trade-bill/

Sacramento Bee Editorial Board (2017) Now that Cap and Trade is approved, here’s what Jerry Brown and legislators must do. Sacramento Bee. Retrieved from: http://www.sacbee.com/opinion/editorials/article162276683.html

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