Scorcher: California Cap and Trade, Where We Stand

Sean Penrith, The Climate Trust
Weekly Policy and Finance Update – April 10, 2017

California cap and trade, where we stand

In a climate change investment report by Deutsche Bank Climate Change Advisors, they determined that successful market opportunities offered investors “TLC”—transparency, longevity, certainty. The interest in clarity and security has never been more pressing in California’s cap and trade program. While California is a beacon of hope in the face of a new federal administration that is decimating efforts to protect against a changing climate, it’s carbon mechanism is not without its challenges in achieving a stable and comprehensive threshold.

On April 7th, the Third Court of Appeals ruled favorably on the legality of the Air Resources Board’s (ARB) use of auctions to distribute allowances. The prospect that ARB may have been forced to eliminate the auction element of the cap and trade program was worrying. This would have removed the auction floor price and volatility would likely have ensued. However, ARB prevailing in the lawsuit delivers more certainty and will help stimulate market activity despite the next step of the California Supreme Court ruling on the case or rejecting an appeal.

Two bills are advancing that craft potential post-2020 scenarios for the cap and trade program. Industry-backed AB 151 proposes extending the cap and trade program through 2030, and the establishment of a Compliance Offsets Protocol Task Force charged with developing new offset protocols that stimulate in-state emission reductions with a particular focus on disadvantaged communities. AB 378, largely endorsed by environmental justice advocates, also grants ARB authority to implement a market-based program post-2020 and focuses on the need for direct emission reductions. If either bill passed with a two-thirds majority, it could make the Court of Appeals ruling moot.

These uncertainties decidedly undermine the vital TLC factor the market needs. It is therefore of little wonder that for the fifth time, the California-Quebec auction was undersubscribed and a total of 143 million allowances have gone unsold. Legislators are the stewards of sound policy that drive California towards its emission goals. Their diligence ensures the TLC so vitally needed to support investment flows.