California cap-trade passes second test better than first

California's cap-and-trade passed, barely, its first test last fall with an auction price that just barely exceeded the $10/ton minimum price.  The second auction of carbon allowances last week went better, with all carbon allowances selling at $13.62/ton, right in the middle of the expected range of $11-15/ton.  The amount of carbon allowances released for auction isn't so big that regulated buyers figured they only needed to pay the minimal amount because it would only take minimal effort to comply with or buy allowances later, nor was it so little that buyers were forced to pay top dollar and would then come screaming that the political system is demanding more change than is economically feasible.

Coming in at another $3/ton also means more money available to fund the other important parts of California's climate mitigation plan.  Finally, half the 2016 allowances were sold, which is fine - the market has another way to satisfy the same demand by selling them as futures.

So far, the California system seems to be doing a lot better than Europe's.  Probably not a huge surprise - we got to see what didn't work.

Incremental progress - we just need more of it and faster.

California dreaming of offsets

I attended a fascinating-to-me workshop* about California using international offsets in the form of reducing deforestation and degradation (REDD) in Acre Brazil and Chiapas Mexico.  The webinar's online, watch me babble a question if you want in the morning session tying their work to our water district's 2020 climate neutrality goal (third video down, at the 02:40:15 time).

The short version is that a relatively tiny fraction of California's effort to get to 1990 emission levels by 2020 would come through international forestry offsets, but even that tiny amount could be a billion dollars of financing, much larger than anything done to date and a potential kickstart to efforts in those two provinces and elsewhere.  This is truly new - the European cap-and-trade doesn't do it.

The meeting was of a group that provides technical recommendations to California and the other provinces/states, so whether they'll be followed is unclear, but they cautioned about giving offsets for actions that increase carbon storage on degraded and cleared land, because that might create incentives to log the land so it can be "restored".

Much or most of the discussion focused on measurement as a key to ensuring the offsets are real additions to what would have happened anyway.  The scientists are very confident that they can measure forest carbon storage accurately and not too expensively via satellite and airborne lidar.  The tricky part though is measuring what would've happened in the absence of offsets.

Passing over the possibility of time machines travelling to alternative universes without offsets for comparison purposes, they instead proposed reference levels of forest losses based on previous ten-year historical averages, projected into the future with some modifications and safeguards (slightly reduced levels available as offsets, further declining over time).  Reductions of emissions in subsequent years compared to reference levels, after adjustments, are the available offsets.  I'm a little unclear on the timing, but I think the Californians buy the offsets first in anticipation that they'll work, then the REDD program does its stuff and is verified.  I do know that if the buyer is liable if the offsets don't work and has to find carbon savings elsewhere in that case.

The beauty of this is that functions on the provincial level, so it's widescale (less leakage) and tracks provincial results instead of trying to measure every little project and assign carbon savings accordingly.  The controversy (or one of the controversies) is that the offset payments go to provincial governments, so how that money could reach the rural communities is an issue.  Safeguards for that will be discussed at a later meeting, and they have the concept of "nesting" project level credits into the provincial system.

A lot is riding on this, both in terms of global carbon emissions and our global ecology.  There's some danger of course, but also some tremendous opportunity.


*Fascinating enough that I may be interested in this area as a career field, so maybe I might have some bias.

Driverless cars, high speed rail, and climate comedy

1. I'm more inclined than not to support high speed rail in California and elsewhere - we need to get people out of the sky.  OTOH, I've wondered for several years whether the otherwise-beneficial role of driverless cars could turn HSR into a financial dinosaur.  Those driverless cars could hook up together as a pod, and even if they can't go 200 mph, they could go faster than humans could drive them and be an acceptable way to travel from San Francisco to Los Angeles when you can make productive use of the entire time.

Maybe building HSR in stages makes sense so we can cut our losses if needed.

2. Marginally related subject:  American University and Sierra Club are running an Eco-Comedy Video Competition for the funniest, under-three minute original video educating people about climate change.  I plan to submit 179 seconds of Joe Bastardi talking, but maybe you can think of something even funnier.

The California Cap passes its first test, barely

News coverage of the California cap-and-trade auction results diverged fairly sharply into whether it went well or had problems. Put me in the half-full category that it went well enough, but just barely.

The Air Board announced a sale price of $10.09 a ton, just barely above the reserve price of $10 and lower than the expected $11-15. Digging around a little doesn’t make the auction mechanics very clear – many bids were far higher than this. The reports imply that everyone paid $10.09, which would mean some type of Dutch auction setup.  (UPDATE:  confirmed it's a Dutch auction arrangement where everyone pays the same price.  Good explainer of the whole auction by Reed Smith is here.  The reserve price is a minimum that keeps the market from collapsing - if there's not enough demand for all the allowances to keep the price above that minimum, the effect of the reserve price is to reduce the supply of allowances being sold.)

I doubt it’s coincidental that the price is just above the reserve – that suggests the ‘market’ expectation is that it won’t be too hard to for California emitters to meet the cap, something that’s uncomfortably close to the problem of the European market that has too high a cap and a collapsed market. OTOH, emitters didn’t have to buy any allowances if they thought they could meet the cap on their own, so their expectation is that the Air Board will keep the California market from collapsing. I put the word ‘market’ in scare quotes because a sealed-bid auction barely qualifies – we’ll get a better idea of market price when trades start happening on a regular basis.

So it worked. A somewhat higher price would suggest a better-functioning market and more incentive for carbon reductions, although a much higher price would provide ammunition to critics’ ridiculous claim that the cap harms California’s economy.

Critics of the system include the state-level California Chamber of Commerce, treading a perilous line against California green energy businesses. The state Chamber filed a lawsuit against the auction on the day before it started. I expect they’ll take some flak for waiting so long to file, but I’ll have to save a look at their legal interests for another day.

The economic interest here is that free carbon allowances actually benefit emitters – the allowances have economic value that can be resold, and California is issuing 90% of the first emissions for free (that percent will decline over time). A 90% benefit isn’t good enough for the Chamber though – they want it all for free, forever. At least they claim they’re not trying to destroy the cap market – they just want free allowances – and that distinguishes them from the evil that is the US Chamber.  This isn't a trivial distinction from the US Chamber, by the way, and shows some-if-inadequate level of responsiveness to in-state business politics.

Even a 100% auction in my opinion would benefit California green businesses and help cement the leadership this state has on the green economy. The state Chamber is being short-sighted on a number of levels, especially if their effort to change the cap market ends up destroying it. This might be a good place for the state legislature to step in and backstop the Air Board’s decision, something that could be possible now that the Democrats have two-thirds majority in both houses, a requirement under the tax-revenue stupidity of California's Proposition 13.

An aside - there is a dividend component to the cap.  In a somewhat complicated procedure, utilities get all their allowances for free but are required to sell some and split the proceeds so 15% goes to reducing greenhouse emissions and the remainder as a credit applied to utility bills.  Seeing that credit will help counter the inevitable claim that the money is just going to solar power fat cats.