Eureka! California strikes gold with carbon market

Author Will Murtha, Senior Reporter

The landmark cap-and-trade program has helped put the Golden State on track to meet its near-term greenhouse gas emissions goal – without wrecking the economy. Will others follow?

California and market partner Quebec easily sold off all of the carbon allowances offered at their latest auction, continuing a run of success that state leaders in Sacramento hope will encourage others to join the party.

One thing that might make such a move attractive to others: The 20 August sale of California Carbon Allowances (CCAs) raised over $725mn for the state’s Greenhouse Gas Reduction Fund. That fund directs money to projects that cut GHGs, like building houses near transit hubs or switching from diesel to electric buses.

Lawmakers love those kinds of projects, especially when they come to their home districts. And in California they have voted accordingly. The state Legislature decided two years ago to extend cap and trade to 2030, a move that preserved a major revenue stream while giving businesses wanting to invest in new technologies greater clarity.

Another plus for some market supporters: The price of CCAs in the secondary market has largely reflected this stability, trading a dollar or two above the program’s price floor of $15.62/metric tonne this year.

That means lower compliance costs for regulated business, which in turn means lawmakers can be less worried about higher prices at the gasoline pump and on the utility bill.

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Some environmental groups and researchers have raised concerns that the market is oversupplied and have asked regulators to consider cutting back the number of allowances, a move undertaken at one point by the EU emissions trading system and the Regional Greenhouse Gas Initiative in the northeast US.

But the California Air Resources Board, which oversees cap and trade, appears loath to tinker with the allowance supply and punish companies that banked CCAs early in the program, particularly when the state is on track to meet its 2020 emissions target.

The agency also recognizes that any success in reducing GHGs will mean little at a global scale if other US states do not follow California’s example. A low carbon price might work just fine for now, to avoid scaring off potential partners.

To date, only Oregon has come close to adopting its own cap-and-trade program. A bill came up one Democratic vote short of passage in the state Senate this year (a walkout by Senate Republicans did not help, either). Lawmakers say they will try again in 2020.

Meanwhile, California will forge ahead with its carbon market. Demand for allowances at the auctions will likely remain high through at least 2020 as regulated entities prepare for more stringent emissions caps in the next phase of the program. The question now is if others will follow.

What’s next for the North American environmental markets?

In this series of blog posts, our Argus Air Daily team are tackling the key trends for these markets. We’ll bring you up to speed on the latest changes and upcoming developments on a state and federal level. Take a look at last week’s post, Vehicles to be the major … vehicles for CO2 reduction.

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