US: Compliance entities calling for straight-line approach to 2030 cap

Author: Dan X. Mcgraw

2016/04/25

Multiple California compliance entities are asking the Air Resources Board (ARB) to take a straight-line approach to determine caps post-2020 rather than reconfiguring the cap in 2021 to estimated emissions, according to comments submitted to the regulator.

The ARB, California’s cap-and-trade regulator, is working to make changes to its programme ahead of the third compliance period. Any amendments passed would not be effective until October 2017.

The ARB has discussed two different cap scenarios. The first option would create a straight line from 2020 to an estimated 2030 cap. The second option would create a 2021 cap based on 2020 covered emissions and would then take a linear approach to 2030.

The ARB said the 2030 cap would be in the 203m-216m tCO2e range.

ARB officials said the first option, or the straight-line approach, would see the cap decline around 4.4% per year. The second option, which would reformulate the cap in 2021, would decline less year on year because the 2021 cap would hypothetically be lower than in the first option.

Supporters say the first option would align more with the ARB’s current programme, and it would result in less market volatility and greater regulatory consistency.

“While upward price pressure is not necessarily a bad thing, as it may help drive investment in GHG emission reductions, the ARB should strive to create a smooth transition to higher GHG prices,” Turlock Irrigation District (TID) said in written comments.

Several compliance entities said using the second option could cause the market to react ahead of 2020. Those entities believe higher prices could come in the last compliance period, which would start in 2018.

California’s cap-and-trade market is believed to be significantly oversupplied through the first few years of the programme, but as the programme gets closer to 2020, that oversupply is expected to dwindle.

Entities have previously said that a strong post-2020 cap could cause entities to start hedging or banking allowances in the final compliance period. That behaviour could put bullish pressure on the California carbon market in the third compliance period.

Natural gas supplier Southern California Gas said the ARB should not change the cap, because the state is on track to reach its climate goals. It added that lowering the cap in 2021 could add pressure to prices.

“Adjusting down the cap below a straight line from the current 2020 cap level as illustrated in Option 2 would not only affect the available allowances post-2020, but it will likely result in increased allowance prices before 2020 due to a perceived reduction in future [cap-and-trade] compliance instrument supply,” SoCalGas said.

However, the International Emissions Trading Association (IETA) and Sacramento Municipal Utility District (SMUD) said the second option would provide a more effective pathway to meet the state’s climate target.

“[Option 2] aligns post-2020 caps with actual 2020 emission levels,” IETA said in written comments. “In contrast, Option 1 carries more risk of pricing volatility due to unintended market behavior stemming from long-term fundamental oversupply.”

After determining the revised cap, IETA added, the ARB could add the same number of allowances into the post-2020 allowance price containment reserve (APCR). APCR allowances can be purchased by compliance entities, but they are sold at a much higher rate.

That idea would allow compliance entities to obtain allowances while taking a more aggressive cap. steven.mcginn@icis.com