Energy Risk USA: Firms Optimistic About California Carbon Market

Author: Mark Pengelly Source: Energy Risk | 16 May 2013 California flies flag for emissions trading Energy market participants upbeat about development of California emissions market, despite legal threats A panel of energy market participants, including representatives of Texas-based power generator Calpine and California-based oil and gas firm Chevron, expressed confidence in the future of the Californian emissions market at the Energy Risk USA conference on May 15. Created under Assembly Bill 32 (AB 32), California’s carbon market was launched with an inaugural quarterly auction of California Carbon Allowances (CCAs) on November 14 last year. A second auction was held on February 19 and a third is scheduled to take place on May 16. Daniel Lieberman, senior advisor for environment and climate change at Chevron, said he expected prices for CCAs to reach $14–15 per tonne at the May 16 auction – well above a minimum $10/tonne floor set by the California Air Resources Board (Carb). As you wait for every milestone to be achieved, there are groups… with lawsuits tucked in their back-pockets The upbeat tone on California’s carbon market contrasts with deep pessimism about the future of the the European Union Emissions Trading System (EU ETS), which has been beset by a massive oversupply of emissions, leading to rock-bottom prices. Elsewhere, the Regional Greenhouse Gas Initiative (RGGI) – a cap-and-trade scheme run by nine states in the US northeast and mid-Atlantic regions – has run into similar difficulties. Despite this, “AB 32 has not been that boring – in fact, it has been quite interesting to follow what has happened as the market takes shape”, said Lieberman. The potential of the Californian carbon market was “a stark difference” to the kind of malaise seen in the EU ETS and RGGI, he added. In part, the success of the Californian emissions market is due to the fact Carb sought to remedy some of the problems encountered by other schemes, say market participants. That included placing restrictions on the role of offsets in the scheme, setting a minimum and maximum price and attempting to stop carbon leakage – or the phenomenon whereby emitters simply move their emissions outside the state. Such measures were motivated by a mistrust of unregulated markets in the wake of California’s 2000–01 energy crisis, said Ethan Ravage, west coast lead at the Geneva-based International Emissions Trading Association (IETA). “In the case of California, everybody has long memories of what happened in 2000 and 2001. They remember what happened with [Houston-based] Enron and they don’t want price spikes in environmental markets that are going to affect consumers, so they’ve actually done a fair amount of work in setting reserve prices in the auctions so there’s a de facto floor and ceiling.” However, the way the scheme has been implemented has given rise to a range of legal challenges – and it is thought that more could follow. From the scheme’s inception, only electricity generators and other major static sources of emissions, such as refineries, are required to buy CCAs. The industries covered by the system would be expanded, Ravage noted, with transportation becoming included in 2015. “As you wait for every milestone to be achieved, there are groups in the background on the extreme left and extreme right with lawsuits tucked in their back pockets,” he said. “There are challenges around whether the state has the authority to hold auctions as opposed to having a tight allocation of allowances; whether it has the authority to regulate out-of-state power; and whether it has the authority to regulate something called resource shuffling, where you just change the way power is dispatched into the state.” But despite the existence of such threats – and the potential impact they might have on prices – panel participants agreed the best strategy energy firms could follow was to simply comply with the scheme. “We hear many stories about lawsuits that are written and ready, just waiting for somebody to file. But we don’t really have a choice – we have to live with the rule,” said Matthew Suhr, director of market analysis at Calpine. On April 19, Carb voted in favour of rules that will see California’s emissions market link up with that of Quebec from January 1, 2014. Taylor Scott International