Cap, linking and market stabilization proposals for California’s Cap-and-Trade Program
On 12 July, the Air Resources Board (ARB) released the proposed 2016 Amendments to the Californian Cap-and-Trade Program. The proposed amendments apply in part to the 2018-2020 trading period, as well as to the post post-2020 period; although the legal basis for the continuation of the Cap-and-Trade Program is currently uncertain.
Cap Setting: 2030 and beyond
In line with Governor Brown’s Executive Order B-30-15, California’s 2030 greenhouse gas reduction target is set at 40% below 1990 levels. To also inform investment decisions up until 2050, ARB suggests to set a tentative long-term allowance trajectory which, based on the goal of 80% economy-wide reductions by 2050 (compared to 1990 levels) as well as recently updated economic modeling, would set the 2050 cap at 66.5 MMTCO2e, down from 200.5 MMTCO2e in 2030. However, the 2050 cap should be considered only as indicative and can be revised through the ARB’s Scoping Plan updates which take place every five years.
Market Stabilization: Reforms to the Allowance Price Containment Reserve (APCR)
The Californian Cap-and-Trade Program operates with an Allowance Price Containment Reserve (APCR). To contain cost, the APCR provides additional allowances in three price tiers for which buyers can bid at Reserve Sales, with current tier prices between USD 47.54 (EUR 43.02) to USD 59.43 (EUR 53.78). Until now, no reserve auctions have been sold. Given the current auction reserve price of around USD 13 (EUR 11.76) and a sufficient supply of allowances, this is not problematic in the short term. However, as the mechanism is currently set up, the price differential between auction reserve prices and the prices at the Reserve Sales of APCR allowances would continually increase, likely making the APCR ineffective as a cost containment measure should auctioning clearing prices and secondary prices rise.
For this reason, the ARB suggests limiting the price differential to the minimum auctioning price plus USD 60 (EUR 54.29), effectively establishing a price ceiling based on the estimated difference of the auction reserve price and the highest Reserve tier price in 2020. This would also reduce the current complexity of having three Reserve Sale price tiers.
In addition, clarity was provided surrounding the allocation of allowances that go unsold at auction. As California operates with an auction reserve price, when this price is not met then a share of allowances will remain unsold. In the most recent auction (May 2016), over 90% of allowances were unsold. According to the amendments, allowances that remain unsold for two years are to be transferred in to the APCR. This rule change will take effect from 1 January 2018.
Linking with further jurisdictions
Aside from recommending the linkage with Ontario’s to be established Cap-and-Trade system, ARB also proposes two new forms of linking with other jurisdictions where the degree of regulatory harmonization is less developed: (i) “Retirement-Only Limited Linkage”, which lets entities under the Californian Cap-and-Trade Program surrender allowances from other systems; (ii) “Retirement-Only Agreements” would allow other jurisdictions to buy and use Californian allowances for compliance. An example of the second type of agreement is the proposal to allow Washington State to use Californian allowances for compliance with their new GHG emissions regulation for large emitters (see 2016 Amendments link for more details).
