avatar

Regulators take stock of 2030 reduction schedule, CPP compliance, and offset usage stats at November board meeting

November 23, 2015 by CaliforniaCarbon.info

CaliforniaCarbon.info, November 23, 2015: The most recent Air Resources Board (ARB) meeting centered on three key issues for participants in California cap and trade. Ahead of formal cap-setting for the post-2020 period, the regulators outlined the suitability of a trajectory based on constant percentage reductions, which would imply steeper volumetric cuts in the early 2020s than in the alternative constant volume scenario. It is also anticipated that compliance with ARB’s targets would automatically satisfy the EPA Clean Power Plan (CPP) obligations of entities in the power generation sector. Finally, it was confirmed that covered entities in total used just over half the maximum number of offsets permissible for their CP1 obligations; we do not, however, believe this should change the overall impression that the offset market is short.

2030 emission reduction schedule

A presentation on updates to the 2030 scoping plan illustrated the scale of ambition of Governor Brown’s April executive order B-30-15, which targets a 40% reduction upon 1990/2020 emission levels by 2030. It was explained that a constant percentage annual reduction schedule was more consistent with the new mid-term target than a linear reduction path, as the diagram below demonstrates.

(Source: Air Resources Board Meeting, November 2015)

The annual percentage reduction required under this scenario is expected to fall in the region of 5.2% p.a., meaning much deeper cuts than the pre-2020 sub-2% p.a. The reduction schedule to 2030 might look like the following:

Year of Compliance

Cap Size (in MMtCO2e)

2021

408.5

2022

387.2

2023

367.0

2024

347.8

2025

329.7

2026

312.4

2027

296.1

2028

280.7

2029

266.0

2030

252.1

Although the update to the scoping plan is still in the public workshop stage and the final regulation is not due to be published until Summer 2017, this may provide an indicator of the current thinking around fulfilling the governor’s mandate.

Expectations and schedule for CPP compliance

In line with previous indications, compliance with the EPA CPP is not expected to necessitate a fundamental re-wiring of California’s existing ETS. With the cap set to enforce tougher reductions goals than CPP’s, the idea that compliance is a legislative formality has gained some traction.

Nonetheless, ARB reaffirmed the importance of considering all design options available. Participants in attendance at the meeting seemed to demonstrate a preference towards a ‘state measures plan’. This in essence relegates the CPP to the role of an ultimate ‘federal backstop’ on power emissions, within the existing framework under which California power generators are already regulated.

One structural edit that was highlighted was a possible post-2020 change to the timing of compliance periods. This would synchronize the calendar of the Californian carbon market with a national power emissions reporting timeline. This could have implications for both the primary and secondary allowance markets. The auctions are presently set up to simultaneously offer two allowance vintages – the current-year vintage, and an ‘advance’ option sold three years ahead of time. Changing the vintage offering (as well as the chronology of annual and major compliance surrenders) could also have implications for the structure and pricing of carry trades in the secondary market.

The time schedule for the CPP plan is as follows:

January 21, 2016 – Comment deadline for federal plans

April/May 2016 – Draft CA compliance plan released

September 2016 – Initial Submission to U.S. EPA

Offset usage

Only 4.5% of compliance instruments surrendered in the first compliance period were carbon offsets, well beneath the regulatory ceiling of 8%. In total 33.9m offsets have been issued so far, which accounts for 8.5% of the c. 291m of total covered emissions from CP1.

While this may appear to counter the narrative of offset shortage which has been a theme of this market in 2015, a closer examination of these statistics should also consider the following points:

  • Under the expanded scope of the scheme from 2015, offset demand is likely to increase, particularly since the new CP2 entrants include the transportation fuels suppliers who receive no industrial assistance and need to procure all their compliance instruments
  • The credits which have been issued so far include (1) early action credits that were generated by project activities occurring as early as in 2004, and (2) forestry projects which produced large volumes upfront and which may not sustain the same contributions on an annual basis going forwards
  • Because compliance instruments are bankable, some entities may already be holding more offsets against their obligations in CP2. Rather than indicate paucity of demand, the 4.5% may instead betray shortage of supply
  • 7.43 of the 33.9 million offsets were issued in September and October 2015 – including the 4.45 million from ta single White Mountain Apache Tribe forest project – and may not have been transferred to compliance users in time for the major surrender. The climate of uncertainty surrounding offset issuances meant most entities would have procured allowances well in advance anyway

Harry Horner (harry@californiacarbon.info)

Steven Neoh (steven.neoh@climate-connect.com)

  • Facebook
  • Google
  • LinkedIn
  • Twitter
  • Email