US carbon markets unlikely to expand in 2014

07 April 2014 22:01 Source:ICIS

The Regional Greenhouse Gas Initiative (RGGI) and California’s cap-and-trade programme are unlikely to add additional members this year due to legal and legislative hurdles, RGGI and California sources told ICIS.

Market participants expect RGGI and California’s programme to grow as the Environmental Protection Agency (EPA) is set to unveil rules that would reduce emissions from existing power plants, or the so-called 111D rules.

Under the current administrative timeline, the EPA would submit final rules by June 2015, and states would have to submit a detailed plan by 2016.

Traders believe those rules could give states an incentive to join a regional carbon programme.

RGGI

RGGI is seen as the most attractive option, because it regulates emissions only from the electricity sector and would have a minimum impact on in-state business.

Ken Kimmell, the former Massachusetts commissioner of the department of environmental protection, told ICIS in January that RGGI was speaking to more than five states about joining or creating their own carbon scheme. He declined to mention what states were speaking with the cap-and-trade regulator.

But a RGGI board member told ICIS any expansion likely will not happen until 2015 because of legal reasons. A lawsuit is likely to be filed after the EPA unveils proposed rules on existing power plants. The RGGI board member said any legal challenge could cause states to take a conservative approach to adhering to the 111D rules in the short term.

Market participants are optimistic that allowances prices could rise if new states join either RGGI or California’s cap-and-trade programme, because it could cause demand to rise for carbon allowances. RGGI recently cut its cap by 45%, causing prices to increase from $3.00/tonne of CO2 equivalent (tCO2e) in December to $4.00/tCO2e in March.

California

California, which is a more complex programme, could expand to other states in the West Coast, such as Washington and Oregon, traders expect.

Officials from the regulator Air Resources Board have said they have discussed their programme with several states and believe the 111D rules could give states, such as Oregon and Washington, an incentive to the system.

However, Washington is unlikely to create its own system or join California until 2015 because of the legislature’s calendar ( see EDCM 3 April 2014 ), while Oregon is also in the stage of evaluating both a cap-and-trade and carbon tax, meaning a potential link or merge could be years away.

Andre Templeman, managing director of carbon consultancy Alpha Inception, said states are discussing their options to adhere to any EPA rules, but some of them may not make any decision until late 2014 or early 2015 because of state legislature timeline. “They won’t join until 2015,” he said.

The same legal and legislative hurdles affecting any RGGI expansion are likely to also impact any growth of the California system. Dan X. McGraw

By Dan X. McGraw