California Turns Its Carbon Market Dream into Reality

That’s it, it has started, for real! Carbon allowances are now available for sale in California. Companies that emit more than 25,000 tons of carbon-dioxide equivalent a year (CO2e) in the power, oil, and industrial sectors will now have to turn in permits for every ton they emit this year and the years to come. Things are moving fast in California right now, so here’s a primer on what’s happening and what to expect for the coming months.

Are people really buying carbon permits?

Yes. Currently California Carbon Allowances (CCAs) are trading for about $15 a ton on the secondary market. Point Carbon reported a big spike in volume traded since January 1st, as a lot of new companies have entered the markets and are cutting their teeth on West Coast-style carbon trading.

The Governor’s California budget, released on January 10, shows that the state expects to raise $200 million for budget year 2012- 2013, and $400 million the following year. Auctions let private companies buy allowances directly from the state. As explained in an earlier post, the permits auctioned have a minimum (reserve) price of $10.71 per ton, but in reality those permits could sell for a higher price if a lot of compliance entities decide to buy allowances rather than reduce their emissions.

What happens next?

Companies are due to surrender their carbon allowances only in 2014, which gives them time to become more familiar with the program and gives time to the market to settled on its "fair price." The program has two lawsuits pending against specific provisions, but none that would threaten the very existence of the market at this point.

However, several pending regulatory developments could change the outlook for California’s program, and will be settled in the first half of 2013. For one thing, California is looking at “linking” its market with a similar program in Quebec. This would bring in a few more emitters, more carbon allowances too, and another layer of complexity as Quebec has its own rule, economic outlook and, oh yes, a different language too. Quebec emitters could buy from and sell to California companies, and vice versa.

The California Air Resources Board (CARB), the regulating agency, is also tweaking some fairly important program rules. One sets a price cap for the market – the agency is looking at simplifying the current provision, and setting the price cap at $50/ton. We’re far from this level right now, but when the cap tightens prices could climb quickly, so this is a way to reassure emitters in California that things will not get out of control.

Finally, CARB is making some more complex changes to the allocation rule and to the treatment of imported power. This is to ensure that the California program doesn’t cause “leakages,” where a decrease in in-state emissions causes a corresponding increase in out-of-state emissions.

How will this impact climate change?

California’s program will impact climate change in two ways. First, well, it will force emission reductions, by imposing a cap on overall emissions and letting the market figure out where the reductions should take place and at what cost. That’s the “cap” part of cap-and-trade. Second, the “trade” part, especially the part where the state sells permits to emitters, means that California has extra money to play with, which will be invested in emission reductions. The Governor’s budget established that the focus of these investments would be on transportation, electricity and water.

What does it mean for businesses?

The start of the California market will change the face of business in many ways. Power utilities, oil companies and industrial companies now have an economic incentive to reduce their greenhouse gas (GHG) emissions – this will force energy efficiency investments and many more innovative ways to keep carbon under control. Carbon markets also create a number of opportunities – and economic growth – for service providers and entrepreneurial people. Companies like Hara and SAP thrive on helping companies measure and monitor their GHG emissions. Project developers like Environmental Credit Corp. and EOS Climate have built a business out of providing carbon credits, called offsets , to regulated entities. The list of the larger ecosystem created by carbon markets is long, which supports (clean) economic growth and contributes to California’s political and economic influence.

What do you think – do carbon markets create more risks or opportunities for businesses?

*** Emilie Mazzacurati is Managing Director at Four Twenty Seven, a climate consultancy firm. Emilie has published extensively on federal climate legislation, regional programs and the interaction of carbon with other commodity markets. She will be teaching a training course on the Nuts and Bolts of California Cap-and-Trade in San Francisco on February 6th.

Image credit: Thomson Reuters Point Carbon