State releases plan to extend cap and trade through 2050

Source: Debra Kahn, E&E reporter • Posted: Thursday, July 14, 2016

California Gov. Jerry Brown’s administration yesterday released a plan to extend the state’s landmark cap-and-trade program in a bid to slash greenhouse gas emissions through midcentury.

The California Air Resources Board (ARB) proposed amendments to the program yesterday evening that envision a carbon market through 2050 with increasing allowance prices, sending a signal to businesses that have been waiting to see if they should keep participating in the state’s quarterly auctions.

The plan to extend the carbon market comes as state lawmakers and Brown (D) are engaged in negotiations to set a new overarching emissions target for 2030. It’s unclear whether ARB has the authority to go beyond 2020 currently, thanks to a combination of potentially limiting language in the original climate law, A.B. 32, and a lawsuit challenging the legality of cap-and-trade auctions under a law requiring a two-thirds legislative majority to approve taxes.

The amendments released yesterday would establish decreasing emissions caps for covered entities through 2031, to reach 40 percent below 1990 levels, and would include preliminary caps through 2050 “to signal the long-term trajectory of the program to inform investment decisions.”

Other proposed amendments would provide for compliance with U.S. EPA’s Clean Power Plan for existing power plants, allocate allowances to businesses in order to prevent emissions from escaping state borders, and streamline how emitters register and participate in auctions.

ARB plans to consider the amendments at a board meeting in September before formally adopting them sometime in the spring of 2017.

The state experienced a sharp decline in demand for allowances in its last auction, selling 10 percent of available allowances. Observers have attributed the market slowdown both to an oversupply of credits — emissions are projected to be comfortably below the cap in 2020 — and to uncertainty about the program’s legal status (ClimateWire, May 26).

ARB has said it would like to work with lawmakers but doesn’t think legislative authority is necessary, as Brown set a target of 40 percent below 1990 levels by 2030 in an executive order last year.

But lawmakers failed to pass the bill extending carbon targets through 2030, S.B. 32, on their first attempt last year, and Republican state senators commissioned a legal opinion finding that they may need legislative authority beyond Brown’s order (ClimateWire, April 25).

To fix oversupply issues, the amendments clarify that businesses can use current allowances to cover their emissions after 2020, which should increase demand in the near term, presuming that buyers have confidence that the market will persist after 2020. They also say that unsold allowances will eventually be placed in a higher-priced reserve that will be made available if prices reach a certain threshold. At that point, the excess allowances will cost $60 more per ton than the minimum auction price, which itself is pegged to the rate of inflation.

That provision should entice buyers to snap up allowances as soon as the next auction, which is Aug. 16, one market observer said.

“If you believe this system is credible, you should buy allowances at today’s low prices and hold them for the post-2020 period,” said Danny Cullenward, a research associate at the Carnegie Institution for Science who questions ARB’s post-2020 legal footing. “Otherwise, you’ll have to buy them back at a much higher price later.”

Another observer said the proposals would ease market jitters.

“Looking at the amendments and the adjustments made, it looks like they responded to the uncertainties that are out there,” said Steve Frisch, president of the Sierra Business Council, a group of 4,000 businesses based in the Sierra Nevada that advocates for climate- and environment-friendly policies. “They created more of an opportunity for allowance reserves; they really created mechanisms for bringing allowances back into the market to stabilize prices if they fluctuate dramatically.”

A ‘model’ state faces legal uncertainty

ARB also said it envisions continuing to hold joint auctions with Quebec, Canada, and linking markets with Ontario in 2018. But it said it doesn’t expect an imminent link with the state of Washington, which recently came out with a carbon-capping plan, or an arrangement to accept carbon offsets from tropical forests in Brazil, which has been under discussion for years.

Environmental justice advocates, who have long criticized cap and trade for its propensity to allow businesses to avoid reducing emissions at the source, praised the lack of an immediate link to international deforestation programs.

“That’s one good thing,” said Amy Vanderwarker, co-director of the California Environmental Justice Alliance.

The amendments also envision submitting the cap-and-trade regulations to U.S. EPA to serve as California’s compliance plan under the Clean Power Plan for existing power plants, if the Supreme Court stay of the federal regulations is lifted.

An advocate for sustainable business practices said California’s leadership on the Clean Power Plan could spur other states to pursue carbon pricing.

“From COP 21 to many other venues, California is seen as a model,” said Kirsten James, senior manager of California policy and partnerships at Ceres, a Boston-based nonprofit. “From that perspective, as well, for cap and trade and setting a carbon price in other states and at the national level, we’re really looking to California.”

Cullenward pointed out that legal questions about the program’s post-2020 status should also apply to ARB’s submission to U.S. EPA. If cap and trade is not legal, then EPA should not accept it as a compliance plan, he said, even if California’s emissions are projected to be well below the federal cap for 2030.

“With this legal uncertainty in the state, it’ll be an interesting question to say to the federal government, ‘Don’t worry about that; we’ve got that taken care of,'” he said.