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California Carbon Opinion: Coronavirus and the WCI Cap-and-Trade

February 27, 2020 by Anant Jain

by Anant Jain

Carbon Market Analyst|CaliforniaCarbon.info

The curious case of Coronavirus has reached the shores of the United States of America. A total of 53 confirmed cases have been reported [2], with 10 cases in California. One CDC official fears that the spread of the virus in the USA is inevitable. With the visible impact of the virus on the Chinese industry, I attempt to examine some of the spillover effects on sectoral emissions in the Cap-and-Trade program.

The California Cap-and-Trade program has an intricate relationship with Chinese imports and exports. California Natural Gas suppliers ship significant amounts of Natural Gas to Chinese terminals. The state is currently the fifth largest exporter in the United States. In 2018, a total of 33 shipments [3] of LNG worth 2.32 million mt LNG sailed out of USA. Secondly, California’s construction sector makes use of cheaper Chinese steel imports. Thirdly, the flow of Human Capital between Silicon Valley and China as well as tourism has a significant impact on the transportation sector. A report [1] estimates loss from Chinese visitor spending at approximately USD 10.3 billion.

Broken supply chains, paltry production and dishevelled trade agreements

The Chinese economy has been strangled by the spread of the disease with logistics and manufacturing getting throttled the most. China has slowed-down manufacturing in key sectors such as consumer goods, oil refining, coal-fired power generation and steel production. One survey [5] finds that facilities are moving forward annual maintenance to average out production halts. Moreover, the absence of port workers and truck drivers has created a supply chain disruption. Some companies report [6] that even though production for few operational facilities continues, there are no means to move inland cargo to the coast. These restrictions on freight movement across China are leading to rising steel inventories.

California is currently the fifth largest exporter of Natural Gas in the United States. In October 2019, California Natural Gas behemoth Sempra LNG signed the first US-China LNG agreement [6] since the start of the tariff war. There are visible signs on the LNG inventory build-ups in South California, which stood at 57.08 bcf on 25th Feb 2020, almost 17 bcf higher than one year ago (See Figure 1). Also, the Energy Information Administration (EIA) is forecasting build-ups in LNG inventory from the onset of the virus, for the year 2020 and expect the return to normality by the next year only. An expected build-up of inventories may result in controlled production, although further research on the subject is needed to devise a structured approach of the direct impact on facility wise emissions.

Perhaps one indicator of such an outlook can be discerned from Natural Gas entity bids at this year’s Joint Auctions. Entities that project weaker demands would eventually control production. This could reflect in their appetite for allowances in the coming auctions.


(Figure 1. LNG Inventory Source: EIA[7])

Infrastructure projects in California rely on cheaper Chinese steel. With a slowdown in steel production and shipments from China, procurers would be forced to look towards alternative suppliers. In the absence of Chinese suppliers, the market may lean towards a sellers’ market (Porters Five Forces Framework). Here, prices and imports could be affected. This may not bode well for the Cement Manufacturing sector with a close attachment to steel in construction. This could create a dampening effect with escalating costs on new constructions as well as time delays. If Cement Manufacturing facilities in California control production due to a bullish price outlook and weaker supply, one could expect a decline in emissions across the sector. To simply state, in the year 2018, the Cement Manufacturing sector reported a 2.9% YoY increase in emissions, totalling up to 7.86 MMt CO2e.

Moreover, the transportation sector contributed to 50% or 159.54 MMt CO2e in the year 2018. The impact of the virus on transportation emissions due to the flow of Human Capital and Tourism is undeniable. It is important not to consider airline emissions under the transportation sector; CORSIA mandates global airline emissions. The effect of tourism boils down to the average spending per tourist and the travelled miles. One report [1] presents that each Chinese visitor spent USD 6500 on average in the year 2018. An absence of such revenue coupled with reduced travelled miles could create a decline in emissions in the sector for the quarter.  

Furthermore, with the shift of US dependency in oil from the middle east, due to the extensive discovery of shale sources, the US Oil industry may remain impervious from the Chinese slowdown. The EIA reports that US Oil production will not be hampered at the current levels of virus contamination. They expect U.S. shale production to rise to a record 9.2 million barrels a day in the coming weeks.

Some of these spill-over effects and their impact on emissions will only be realised in the reported emissions for the year 2020, which the ARB will release by the end of 2021. Further to that, significant research is needed to isolate the percentage impact on emissions from the Chinese slowdown.

While the virus situation leaves a grim mood in global markets, there’s only so much that the US Feds can do. Much of what lies ahead rests on the level of containment that the Centre for Disease Control (CDC) chooses to exercise. 

References:

[1] Slotnick, David. “The Coronavirus Is Slamming the US Travel Industry, with Experts Predicting It Will Wipe out More than $10 Billion in Spending from Chinese Visitors.” Business Insider, 18 Feb. 2020, www.businessinsider.in/business/news/the-coronavirus-is-slamming-the-us-travel-industry-with-experts-predicting-it-will-wipe-out-more-than-10-billion-in-spending-from-chinese-visitors/articleshow/74200145.cms.

[2] “U.S. Coronavirus Cases.” Worldometer, www.worldometers.info/coronavirus/usa-coronavirus/.

[3] “Sempra, CTG Sign First US-China LNG Agreement since Tariff Implementation.” Sempra, CTG Sign First US-China LNG Agreement since Tariff Implementation | S&P Global Platts, 1 Oct. 2019, www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/100119-sempra-ctg-signs-first-us-china-lng-agreement-since-tariff-implementation.

[4] Bloomberg. “China’s Economy at 40-50% Capacity Amid Coronavirus, Data Suggests.” Time, Time, 18 Feb. 2020, time.com/5785651/china-economy-slowdown/.

[5] “Chinese Steel Mills Mull Output Cuts Due to Coronavirus: Platts Survey.” Chinese Steel Mills Mull Output Cuts Due to Coronavirus: Platts Survey | S&P Global Platts, 17 Feb. 2020, www.spglobal.com/platts/en/market-insights/latest-news/metals/021720-chinese-steel-mills-mull-output-cuts-due-to-coronavirus-platts-survey.

[6] Ghilotti, Davide. “Border Closures Leave Chinese Inland Miners Cut off from Export Markets.” Industrial Minerals, www.indmin.com/Article/3918688/Border-closures-leave-Chinese-inland-miners-cut-off-from-export-markets.html.

[7] “U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” U.S. Energy Information Administration (EIA), 11 Oct. 2019, www.eia.gov/special/disruptions/socal/winter/#dashboard.

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