Those with the most to gain from California's pending carbon market insisted yesterday that the state is still on track to have a robust emissions trading system, despite regulators' announcement this week that enforcement would be delayed by a year.
Carbon traders and brokers uniformly expressed optimism about the fact that emitters are getting at least a six-month reprieve from participating in emissions trading. The delay, they said, would give policymakers time to flesh out details of how the nation's first comprehensive cap on carbon dioxide will be monitored and enforced.
"I thought it was actually quite reassuring," said David Hunter, U.S. director for the International Emissions Trading Association, which counts 160 members including utilities, manufacturers, oil companies, brokers, banks and offset project developers.
"The market will respond accordingly and begin delivering emissions reductions even before the launch date. We'll see a real market, an actual market, in emissions allowances, in 2012," Hunter said. "There is already a futures market, and that will only continue to grow. IETA's members, who comprise most of the carbon market, don't seem to be fazed by the news."
California Air Resources Board (ARB) Chairwoman Mary Nichols, pinned the decision on the need to properly enforce rules governing the buying and selling of emissions credits in state-run auctions, as well as spot and secondary markets that are springing up to handle the credits.
"One of the biggest things we're facing is the fear factor of the market itself," she said yesterday during a conference call. "To get a market monitor in place and do the testing is just going to take a little longer than if we were facing a January deadline to get it all done." Nichols first broke the news Wednesday at a state Senate hearing in Sacramento (ClimateWire, June 30).
Delay won't affect state emissions cap
Under the new plan, entities that emit more than 25,000 metric tons of carbon dioxide equivalent per year will begin trading credits at the end of next year to cover their emissions reduction obligations for 2013 and later, rather than at the start of 2012. The trading program will still run through the end of 2020, in a bid to bring emissions levels to 1990 levels by then as specified under state law A.B. 32. Forward prices of allowances for 2013 delivery jumped 8 percent Wednesday to $16.75 per ton, according to a price assessment taken yesterday by Point Carbon News, a carbon market-tracking news service.
Ricardo Bayon, a co-founder of EKO Asset Management Partners in San Francisco, said the decision could bode well for the market.
"This could actually be a good thing," he said. "We definitely want a system up and running as fast as possible. What we don't want is a system that doesn't work and has problems."
Dan Kalb, California policy manager for the Union of Concerned Scientists, was agnostic.
"To me, you don't really know what the kinks and problems are until it's fully operational and enforceable," he said. "No matter when you start enforcing it, after that point inevitably you're going to notice some problems, and then you have to make more tweaks."
Most sources agreed that environmentally, the hiccup will likely not be significant since the emissions cap for 2012 was set at roughly business-as-usual levels.
"A six-month delay in the date of the first auction is not a huge delay," Hunter said. "Businesses need time to plan anyhow, and if you have a program where you're uncertain about when it will start or what the rules will be or when they'll come out or when they'll be approved or when all the legal challenges will be put to bed, that makes a difficult environment for businesses to operate in. Delaying the compliance market by one year will help resolve all those things."
Effect on firms' compliance plans
Kalb speculated that with an extra year before compliance, oil companies, power generators and manufacturers might put off figuring out exactly what mix of offsets, credits and actual reduction efforts they need. "There might be some feeling among them, 'Oh, this is being enforced, we have to do something every year.' They might not actually have to, but they might feel a stronger sense of obligation," he said. With 2012 essentially a dry run, "We just want to make sure they don't misread this transition year and say, 'We don't have to think about it.'"
Bayon, for his part, said investors and emitters alike are still looking for certainty, which will likely come by October, when ARB has to finalize its market design according to internal deadlines. "It makes people rethink where and how they'll hedge their obligations," he said. "People who want to meet their obligations and know they'll have more stringent obligations in the future will want to be buying offsets and banking along the way, so the sooner we can have those rules ... the better."
Nichols said that the delay also shouldn't affect California's partnerships under the Western Climate Initiative, a seven-state, four-province group that is loosely committed to cap and trade.
"Despite the fact that it might seem a little lonely out there at times, the reality is our program is being looked to by other states as well as the U.S. government as a model for the future," Nichols said. "This is something we are getting encouragement from all quarters to continue."
British Columbia Environment Minister Terry Lake said in an interview that he had met with his equivalents in Quebec, Ontario and Manitoba earlier this week to discuss the developments in California. All four are still supportive but not intending to start trading in 2012, he said. "Without trade we would not do cap and trade, so without California there, it doesn't make sense for us to go forward alone."
"Certainly it's not a complete surprise," he said. "We had some concerns ourselves whether the mechanisms would be in place and be tested and robust enough to embark on a full program in 2012."
British Columbia's own carbon tax on large emitters, which increases to C$25 per ton tomorrow, still factors into officials' decision whether to participate, he said. "We're marching forward to be ready to go, but we have to make a final decision on whether going forward with cap and trade is in the best interests of B.C.," he said. "We're doing a lot of analysis in terms of our economy here."