Emissions Trading Worldwide

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The California Cap-and-Trade Program Looking Back on the First Phase David Clegern & Mary Jane Coombs, California Air Resources Board Background on California’s program Groundbreaking legislation passed in 2006 by the California State Legislature requires that the state return to 1990 levels of greenhouse gas (GHG) emissions by 2020. The economy-wide California Cap-and-Trade Program (the Program) is a key element of California’s climate plan. It sets a statewide limit on sources responsible for 85% of California’s GHG emissions, and establishes a price signal in order to drive long-term investment in cleaner fuels and a more efficient use of energy. The Program is designed as part of a comprehensive set of policies. It works in concert with California’s Low Carbon Fuel Standard which reduces the carbon intensity of transportation fuels, California’s Advanced Clean Car Program which forces the transition to a largely zero-emission vehicle fleet, and California’s Renewables Portfolio Standard which obliges electricity utilities to increase purchases of renewable electricity to 33% of their total by 2020, and to 50% by 2030. Together, these policies drive down emissions while spurring economic growth and technology development. This combination of policies also spreads the costs and benefits of fighting climate change across the economy. They not only reduce emissions, but also encourage the development of new and more efficient businesses and generate a growing number of jobs. Since these policies have come into effect, California’s carbon emissions have continued to drop while the economy has grown at a pace well beyond the national average. “This high compliance rate demonstrates that industry can fulfill the key role it must play in California’s effort to curb the impacts of climate change. It also shows that our staff has designed a program which is manageable for those who must participate.” 1 The emissions cap for 2013 was 162.8 million metrics tons of CO2e (MMTCO2e), and for 2014 was 159.7 MMTCO2e. With greater sectoral coverage, the cap more than doubled to 394.5 MMTCO2e in 2015. 2 Large sources emitting at least 25,000 MMTCO2e per year. 3 Including an optional limited number of offset credits. 4 California actually holds two auctions simultaneously: the current auction that sells allowances from the year in which the auction is held, and the advance auction that sells 10 percent of the allowances of the budget year (vintage) three years ahead. 25% 20% 15% 10% 5% 0% –5% –10% –15% –20% –25% Change since 2000 2000 2001 2002 2003 2004 Metric GDP Population GHG Emissions GHG Emissions per Capital GHG Emissions per GDP 2005 2006 2007 2008 2009 The California Program has a number of design features that offer covered entities flexibility as to when, how and where emissions are reduced, including the use of offsets and multi-year compliance periods. At the same time, a progressively declining cap further serves to drive emissions reductions in line with California’s climate change targets. From 2015 onwards, the cap is scheduled to be reduced by about 3% each year. 1 The extensive coverage of the Program drives emissions reductions across the whole economy. In the first compliance period (CP1, 2013–2014), the Program covered around 450 entities, including both stationary sources 2 and importers of electricity. Last year, California became one of the few jurisdictions in the world to include the transport sector. As a result, suppliers of transportation fuels, natural gas and other fuels now have compliance obligations. The first two-year compliance period began on 1 January 2013. Across this period, covered entities were required to meet their obligations in two stages. Firstly, in November 2014, entities had to surrender allowances 3 for 30% of their 2013 emissions. This mid-period compliance event (now an annual provision) was implemented to ensure entities keep track of their compliance obligations and to act as a kind of ‘down payment’ to safeguard against default. The following year (2 November 2015), entities were required to submit allowances for the remaining 70% of their 2013 emissions, and all of their 2014 emissions. Virtually all entities (402 of 404 covered facilities and importers) complied with the Program in its first period. As California Air Resources Board Chair Mary D. Nichols notes, “This high compliance rate demonstrates that industry can fulfill the key role it must play in California’s effort to curb the impacts of climate change. It also shows that our staff has designed a program which is manageable for those who must participate.” 2010 2011 2012 2013 Associated 2013 Value 2.05 trillion (2009 $) 38.2 million 459.3 MMTCO2e 12 metric tons CO2e per person 224 metric tons CO2e per million dollars GDP Population GHG Emissions GHG Emissions per Capital GHG Emissions per GDP Figure 1: Change in California GDP, population and GHG emissions since 2000. Source: California Air Resources Board Emissions Inventory; http://www.arb.ca.gov/cc/inventory/data/graph/trends/ghg_trends_00-13_20150504sm.png 12
Allowance prices are gradually rising Allowances are issued by the Californian Air Resources Board and are sold at quarterly auctions. All bidders pay the same auction settlement price — the lowest bid above the reserve (floor price). When compliance began in 2013, the reserve price was 10.71 USD. As of 2015, this has risen to 12.10 USD and will continue to increase annually at a rate of 5% plus inflation. In the past three years, the settlement price has seen a 20% rise from 10.09 USD at the first auction held in November 2012, to 12.73 USD at the most recent, sold-out auction in November 2015. To date, the settlement price has been at or very near the floor price, which has served to keep the cost of compliance relatively modest. During the quarterly auction, covered entities also have the option of buying allowances for future compliance. 4 This regulatory feature provides further flexibility, as companies can buy future vintage allowances while the price is low and then bank them for future use. At the most recent advance auction in November 2015, all available vintage 2018 allowances were auctioned for 12.65 USD. “The California-Québec carbon market provides impetus for the development and use of cleaner, renewable fuels, and further evidence that weaning society from heavy use of fossil fuels need not be a painful effort.” Linking with Québec and beyond California’s Program has been linked with the Canadian Province of Québec’s Cap-and-Trade system since 1 January 2014; the linked systems have held joint auctions since fall 2014. This is the first time sub-national jurisdictions have coordinated and linked their Capand-Trade systems. Thanks to close consultation and planning, the linking process has run smoothly. Linkage with Québec has also increased the environmental and economic benefits of both systems. Not only are more emissions being reduced, but market liquidity has also increased. This successful process provides a model for future linkage, as carbon markets continue to grow and mature across North America and the rest of the world. Looking ahead, California and Québec’s joint program may expand even further with the announcement of a new Cap-and-Trade policy planned in the Canadian province of Ontario. The three jurisdictions are currently holding discussions regarding potential linkage. California is also conducting ongoing conversations with a number of jurisdictions either already operating or planning a Capand-Trade program, with the goal to strengthen carbon markets “To date, the settlement price has been at or very near the floor price, which has served to keep the cost of compliance relatively modest.” around the world. These jurisdictions include China, Japan, South Korea, the European Union’s Emissions Trading System, and the Regional Greenhouse Gas Reduction Initiative. Discussions are also underway with other U.S. states, particularly in light of the Obama Administration’s recently unveiled Clean Power Plan (CPP). Signed by the U.S. Environmental Protection Agency (EPA) Administrator in August 2015 and published in October 2015, the CPP regulation establishes targets for each state to reduce carbon emissions from existing power plants by 2030. With states given the flexibility to decide how to meet these targets, the California Cap-and-Trade Program may provide an attractive compliance model. California sees its carbon market not only as a means of driving down emissions, but as a vehicle for building stringent national and international standards for quantifying carbon reductions. While the market-based approach has a number of benefits, it is viewed as a regulatory means to an end, and not an end in itself. Agreement on solid and verifiable standards for emissions reductions is critical to mitigating the worst impacts of climate change. Conclusion The California-Québec carbon market provides impetus for the development and use of cleaner, renewable fuels, and further evidence that weaning society from heavy use of fossil fuels need not be a painful effort. The growth in awareness of climate change issues and emissions reduction programs by private businesses, spurred on by customers and stockholders, is a strong indication the world is beginning to change direction. The fact is, none of us are ‘going it alone’ anymore in the battle against climate change, and a healthy carbon market provides another opportunity for us to work together to tackle a problem none of us can take on by ourselves. international carbon action partnership 13
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Page 5 and 6: 03 Foreword Jean-Yves Benoit and Ma
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Hubei (Pilot) Emissions Trading Sys
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Shenzhen (Pilot) Emissions Trading
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Taiwan under consideration On 1 Jul
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List of Acronyms ASSET Advanced Tec
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As world leaders gathered in Paris
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