California Carbon Info: Regulatory Round-up – Informal Workshop on Potential Amendments to Cap-and-Trade Regulation
As the passage of AB 398 has strengthened and extended California’s Cap and Trade program, we think our readers will benefit from a spotlight on the trends in the carbon credit market. As such, we periodically feature guest articles on California’s Cap and Trade program from our friends at CaliforniaCarbon.info. CaliforniaCarbon.info is a comprehensive information service covering the Western Climate Initiative (WCI) carbon market in North America. CaliforniaCarbon.info provides emissions and price forecasts, and regular analysis of the allowance and offset market. We are excited to feature their expert analysis on California’s Cap and Trade program and the forces that impact the carbon credit market. Look for regular articles from Stillwater’s LCFS Newsletter featured at CaliforniaCarbon.info.
May 15, 2018
CARB Staff’s recent Workshop to Continue Informal Discussion on Potential Amendments to the Cap-and-Trade Regulation touched on some of the vital features of the program, namely: allowance allocation (specifically, assistance factors), cost containment, setting a post-2020 cap, direct environmental benefits (DEB), and the price ceiling. Comments from participants were used as a foundation for the staff presentation. Throughout the discussion, staff encouraged stakeholder feedback on different methodologies and/or processes that might have been overlooked.
CARB staff made it clear that they want to stick to the core features of the C&T program that have worked effectively. Arguably, the defining factor of C&T has been that it is a market mechanism and should continue to be treated as such, even as amendments are made. A reoccurring aspect of these discussions continues to be about striking a balance between encouraging economic growth and reducing emissions. Environmental groups spoke about the importance of California’s ability to be more ambitious at this time, while staff pointed out that further stringency in the program without proper considerations can hinder economic growth and increase the risk of leakage.
A discussion about considering lowering annual emissions stemmed from California having higher ambitions. It was made clear that the state of California is legally bound to decrease overall emissions, so the program (even post-2020) is being designed so that the focus remains on the reduction of aggregate emissions as opposed to annual emissions. If annual emissions are going to be taken into consideration, as suggested by some attending the workshop, then assumptions and calculations for annual reductions could be different even if the current cap is mandatorily lowered annually.
Another core feature of C&T is that it is market-driven. Even with changing regulations, CARB wants to keep it competitive as it has been in the past since prices are market driven.
Unused allowances: Unused allowances post-2020 are clearly a divisive topic given the conversation during the workshop. As mentioned in the supporting documents written by CARB Staff, for some unused allowances indicate that C&T and its supporting programs like the Low Carbon Fuel Standard (LCFS) and Renewables Portfolio Standard (RPS) are working effectively to reduce entities’ need for additional allowances i.e. lowered emissions. For others, unused allowances in the market represent allocation over the caps which could allow entities to comply whilst not reducing emissions.
The availability of these allowances undermines the stringency of the program which could work against achieving necessary greenhouse gas (GHG) reductions by 2030. Current modeling shows that 52,400,000 allowances should be in the Allowance Price Containment Reserve (APCR) where they are available to be bought at a higher price, thus allowing cost containment. The formula for calculating this number remains consistent with pre-2020 years and within the cap. So, even if entities do buy allowances from APCR, allowances will be limited in accordance with the cap so that there is lowered GHG emissions. CARB is also considering removal of around 2 million additional allowances from circulation into post-2020 reserve tiers from 2026 to 2030 since the offset limit increases from 4% to 6% for the last 5 years of the program.
After taking into account certain factors, the number that CARB is using for its calculations is 150 million unused allowances post-2020 which CARB Staff advises should not be removed from the APCR in case of deficiency in supply in the future.
Allowance Allocation – Cap Adjustment Factor: Most stakeholders pointed out that a 100% assistance factor should be in place for Compliance Period 3 (CP3) which will help entities adjust into the post-2020 period with lower caps. They also cited high compliance costs, leakage risks, and “disruption to affected covered entities.” The cap adjustment factor (CAF) is already set to decline much more rapidly in the post-2020 period (i.e. 3.6% per year, more than 2% faster than current CAF). Staff said that the rationale for providing a 100% assistance factor in CP3 is that there could be potential leakage in CP3 which does not necessarily consist of entire industries moving out of the state, however, they could be incentivized due to competition from companies that do not have compliance obligations.
CARB Staff expressed openness to suggestions on a proper definition of DEBs. Staff is looking for active stakeholder participation on this.
Conclusion: CARB Staff stressed the fact that there are a number of uncertainties that could alter the outcome of the C&T program in the coming years. Exclusion of these factors in methodologies does not imply oversight; as the process unfolds, however, CARB Staff expect their methodology to improve along with stakeholder feedback. However, regulations that have worked in favor of C&T in the past should be kept intact in order to attain sure-fire results.