West is best? California's 'boring' carbon market on centre stage

In the wake of Barack Obama's state-by-state approach to emissions reduction, the rest of the US may now be looking hard at California's unassuming carbon approach.

Reuters

When California launched the country's most ambitious carbon trading scheme 18 months ago, officials hoped that neighboring states equally worried about climate change would quickly follow its lead, expanding the nascent market.

On Monday, those states may have finally got the nudge they needed to jump into the $US20 million a day California market for emitting carbon dioxide after the Environmental Protection Agency released much-anticipated new rules to force deep cuts in greenhouse gas emissions from existing power plants.

Those rules allow state officials broad leeway to implement curbs across the entire power system, rather than limit cuts to individual plants.

The rules will "make cap and trade more feasible and more attractive" to states like Oregon and Washington, said Stanley Young at the California Air Resources Board.

The measures come amid growing signs that governors and state legislatures are finally overcoming their reticence to take on a complicated program amid a long and deep recession – noticing, perhaps, that California's cap-and-trade scheme has enjoyed an untroubled roll-out over the past year and a half.

Carbon prices in California, which caps carbon emissions and gives companies the ability to purchase and trade emissions permits, have been low and steady, avoiding the kind of wild gyrations that undermined Europe's cap-and-trade system, the world's first, launched in 2005.

The California market's chief architect, Mary Nichols of the ARB, praises the placid price, which has barely wavered from around $US12 per tonne since last summer: It's "a boring market."

Encouraged by low prices, local businesses who must buy the permits to account for excess output have bought all the current year permits offered in each of the state's seven quarterly auctions, which have generated $US750 million for clean energy programs.

Legal challenges to the program from the political left and the right are petering out, and the state is on track to meet its target of producing 33 per cent of its electricity from renewable sources like wind and solar by 2020.

By the end of the decade, emissions should drop to 1990 levels, according to a report this month – bang on target.

Governors look in

Last month, Washington Governor Jay Inslee signed an executive order calling for the creation of a carbon market in the state, although he will still need sign off from the state legislature before it can be implemented.

Last year, Oregon Governor John Kitzhaber joined California Governor Jerry Brown, British Columbia Premier Christy Clark and Inslee to sign an agreement that called for "meaningful coordination and linkage between states and provinces across North America" in fighting climate change.

Midwest states, which once envisioned a regional carbon trading system of their own, may revive those plans, officials have said, offering the opportunity to sell them on joining the Golden State's market.

California is already set to link its market with the Canadian province of Quebec later this year, showing that geographical proximity is unimportant when it comes to carbon market partnerships.

While the addition of Quebec will only increase the market's size by about 20 per cent, California officials say it set an important precedent for how to link two markets.

'Tough sledding' for brokers

California utilities like Pacific Gas & Electric and Southern California Edison have embraced the program. Earlier this year, PG&E paid out its first "climate dividend," reimbursing its customers for higher electricity bills due to the cap and trade program.

Oil refiners such as Chevron have been less enamored, warning that gasoline prices will rise and plants may be shut as carbon prices climb. Adding transportation fuels to the program next year may boost pump prices by about 12 cents per gallon, according to Emilie Mazzacurati, managing director of climate change consultancy Four Twenty Seven.

A boon to the state, the scheme's tame prices have made it difficult for brokerages like Evolution Markets and BGC Environmental Brokerage, and Amerex Brokers to capitalise on the still tiny market.

Brokers say they are determined to stick with the market, believing their patience will be rewarded in the coming month when demand for permits on the secondary market increases ahead of the market's planned 2015 expansion.

"It's been tough sledding but we expect to see liquidity pick up later this year," said Lenny Hochschild, managing director of Evolution Markets' Carbon America's Group. 

Originally published by Reuters. Reproduced with permission.