The linked Quebec–California carbon market has passed another significant milestone en route to demonstrating how effectively cap-and-trade systems can cut emissions and generate clean energy investments.
Just under a month ago, the system held its second linked carbon dioxide auction, selling 100% of available allowances and generating $1.02 billion dollars for clean energy and emissions reduction projects, consumer bill relief, and government operations.
But even more significant than overall revenue, the system proved carbon markets can expand and remain strong through smart design, even after it nearly tripled the total number of permits available for sale by including transportation fuels for the first time.
One Auction, $1 Billion In Clean Energy Revenue
February’s auction generated serious revenue for the Quebec-California carbon market. Every single one of the 73,610,528 2015 allowances sold out, with a clearing price of $12.21 per ton of carbon dioxide emitted. This price was 11¢/ton above the auction floor price and the first joint auction’s clearing price, both of which stood at $12.10/ton.
In addition to the 2015 allowances, the auction sold out of all 10,431,500 available 2018 future allowances at $12.10/ton, a noticeable increase over the previous auction’s $11.86/ton paid for 2017 future allowances (future allowances are “banked” and can only be used for the year they’re purchased), and further proof industry expects the market to keep working well into the future.
While the allowance prices were “below market expectations” for some analysts, these financial results are still significant. The system roughly doubled revenue over its previous auction, and nearly equaled cumulative revenue from either 2013’s $1.4 billion or 2014’s $1.2 billion. In the absence of federal policy and uncertain support for clean energy incentives, dedicating revenue from carbon markets to decarbonization keeps gaining importance in the flight against climate change.
California Carbon Market — An International Model?
But perhaps more important than just generating revenue, the February auction proved carbon markets can expand to cover new sources of emissions without exceeding demand if they’re flexible. Issuing more permits than a market can bear has hamstrung the European Union’s Emissions Trading System, creating a persistent oversupply glut and deflating prices for years without a clear fix.
Transportation fuels are California’s single biggest source of emissions, and adding fuel wholesalers to the program roughly doubled the overall market size. State regulators increased the available permits in line with expected demand, and at a level they believed would protect consumers from price spikes.
The joint carbon market also reduces emissions limits (the “cap” in cap-and-trade) over time as actual emissions decrease. For instance, 2013 actual emissions were 11% below California’s cap and 6% lower than Quebec’s cap, but instead of a surplus, demand and prices have roughly remained in line with market expectations. This delicate balance has been achieved by auctioning off slightly fewer permits than previous year’s actual emissions with realistic price floors (the US EIA has a deeper examination of this balance).
By staying nimble and realistic, the Quebec-California carbon market has grown with demand without major stumbles along the way. “The strong foundation built over the first two years of the program allowed the market to easily pass this important growth test, remaining stable and strong even in the face of a considerable change in allowance supply and shifting market dynamics,” blogged Katie Hsia-Kiung of the Environmental Defense Fund.
California Carbon Market — An International Model?
Ultimately, while California and Quebec are benefiting in the short term from fewer emissions and more clean energy investment funds, the most significant impact of their linked system may come beyond their borders as a model for successful carbon market design and operation.
California has been working on effective designs for China’s national carbon market since 2013, which is scheduled for launch in 2016. Prices and demand have fluctuated among China’s seven regional pilot programs, but California and Quebec are showing how sub-national carbon markets can work in tandem, and a recent report found California has “helped create something of a state model for subnational international cooperation on climate change and energy issues.”
The Quebec-California carbon market could also realistically be joined in some form by Oregon, Washington State, and British Columbia through the Pacific Coast Collaborative; and could potentially link with the Northeast U.S. Regional Greenhouse Gas Initiative, which has also established a flexible cap that declines over time.
China’s carbon market will become the largest in the world when it launches, and the country already has the world’s largest economy. California, if it were its own country, would have the world’s eighth-largest economy. So if carbon markets work in these two economic powerhouses, why won’t they work in the 60+ national and subnational markets implementing carbon pricing?