Q&A: Price floor key to California auction results
San Francisco, 30 May (Argus) — Chris Busch is the research director at the clean energy think tank Energy Innovation, where he focuses on California's climate programs. In this interview, edited for length and clarity, Busch discusses the results from the recent California allowance auction and the future of the state's cap-and-trade program.
California and Quebec held their most recent joint-allowance auction on 16 May. What would you call out as the highlights of the auction results?
Clearly, the selling of the full amount of current vintage allowances that were offered was the outstanding feature of the results. Also, the price was pretty significantly above the floor at $13.80/metric tonne, compared to the floor of $13.57/t. The strength of the bidding was notable.
You predicted that market fundamentals would, after a series of undersubscribed auctions, lead to stronger results in the May sale. Can you explain further?
We are in the last year of the second compliance period and by 1 November 2018, emitters are going to have to submit allowances to cover their emissions. There is some pretty straightforward math around what emissions are, what entities are currently holding and what they have already submitted.
You can see that there is a tightening of the market — that is the reference to fundamentals. The price floor has had a significant effect in rebalancing supply and demand. Another way to put it: the price floor has corrected the oversupply that had been enabling the previous auction results, which would not have been able to sell much below the full quantity offered if the market had been tighter.
A fair reading should also recognize the legal certainty that increased with the decision of the 3rd District Court of Appeals upholding the California Air Resources Board (ARB) approach around auctioning. That was clearly another positive factor for the results.
What do you anticipate for the remaining two quarterly auctions of 2017?
It is a bit early to be overly specific about predictions, but I would say it is safe to assume we are not going to see a return to the very low sales of the last year.
The same fundamentals that we were looking at for this auction point to a need for minimum sales of 70pc at the next two auctions. Depending on market sentiment, you could see those levels or higher.
Do you believe that the period of oversupply in California's carbon market is coming to a close and, if so, what is the timeframe?
In terms of the second compliance period, that is true. I would say the oversupply issues are not going to be so significant for the rest of this year.
However, over the longer run, there continues to be a condition of oversupply. In my recalibrating cap-and-trade report released in March, I show that, assuming 4pc offset use, and assuming a continuation of the emissions reductions that we have seen historically, emissions would not reach the cap levels until 2020.
The price floor is proving itself as an important design feature and it is doing its job. But in terms of caps falling significantly below emission levels, I do not think we are going to see that until 2021, absent some near-term adjustments around cap levels by the authorities in California and Quebec.
How does Ontario's cap-and-trade program, which plans to link with the joint California-Quebec market in 2018, factor in?
It is an important additional dimension. I am not as knowledgeable about the Ontario data, but the general thinking is that the addition of Ontario to the cap-and-trade market would increase the stringency of the program and would introduce some greater scarcity and could lead to oversupply being resolved sooner. Ontario joining the market should help with stable auction sales and prices.
Do the auction results change the dynamic in Sacramento as lawmakers consider extending cap-and-trade beyond 2020? Some critics say the program is underperforming.
I do not think it is going to make a huge difference, but it should somewhat strengthen the arguments people are making who believe the system is basically working.
How would you change the cap-and-trade program to help the state to accomplish its 2030 greenhouse gas emission reduction goals?
There are some good outlines emerging in the bills that we are seeing in the sense of increased local stringencies and measures to provide assurances that clean air benefits produced by the program are going to be fairly distributed — in particular that disadvantaged communities will receive an adequate share of those benefits. When matched with some additional cost control measures, that seems like the right formula for finding a compromise that builds on the current system but acknowledges room for improvement.
The ARB board is set to consider its scoping plan in June. How does that process interact with developments in the legislature?
The ARB I would say is in a difficult position. They naturally are not giving up on the possibility that no additional legislative action is needed. I think there are people reading the most recent court hearing as increasing the weight of that argument.
However, clearly ARB and the Brown administration want to put a rest to any doubts with a two-thirds vote by the legislature. My sense is that it would be really helpful for ARB's work if the legislature can quickly come to agreement with the governor on an extension.
I am not sure I can really speculate at this time what ARB would want to do if the issue is still being debated. My sense is that the scoping plan document is really more of a high-level strategy and it is not a regulatory document. ARB may decide to move forward with the scoping plan even if the legislature is still debating these bills with the thinking that it is more of a conceptual document, and each of the pieces will need to be worked out through the regulatory process — so they may feel they are not getting too far ahead of the politics by moving forward.
Any closing thoughts?
An important implication of these results and important lesson for policy makers — especially around designing cap-and-trade programs — is the importance of a robust price floor. This result is really a triumph for the effectiveness of ARB's price floor.
In other programs around the world, when you see oversupply, the result is essentially a spiraling down of prices to very low levels. That has not happened in the California-Quebec program. Instead, with the price floor what we are having is a more stable price and additional greenhouse gas reduction benefits and additional clean air benefits produced due to the feature of the price floor. Hopefully policy makers around the world will take that lesson away from these results.