With California's final passage of an economywide cap-and-trade program, how can industry adjust to a fragmented North American carbon market? During today's OnPoint, Elizabeth Zelljadt, regional editor for North America at Thomson Reuters Point Carbon, discusses her expectations for California's program and its impact on the Western Climate Initiative. She also addresses carbon price fluctuations in Europe.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Elizabeth Zelijadt, regional editor for North America at Thomson Reuters Point Carbon. Elizabeth, thanks coming on the show.
Elizabeth Zelijadt: Thanks.
Monica Trauzzi: California has passed an economywide cap-and-trade system after years of discussion. With all the talk about the impact of cap and trade on the economy, is California sort of putting itself at a disadvantage by passing a program like this?
Elizabeth Zelijadt: I don't think so, partially because the cap and trade component of the program, as a whole for California, is really just a small part. The entire AB 32, Assembly Bill 32 that passed the Legislature in 2006 is really a comprehensive package and the cap and trade part of it is covering at first just electricity sector and industry sector emitters and then later fuel, so coming closer to the whole economy. But, as a part of the emission reduction effort, it's only one piece.
Monica Trauzzi: Utilities and refineries will begin trading in January 2013. You were telling me before the show that we're already seeing some types of trading happening. Is industry ready overall for this program?
Elizabeth Zelijadt: The ARB, the Air Resources Board in California has made very sure to try to prepare the participants in the program as much as they can. They have put out all the dates beforehand. The regulation that was passed in October, the full adoption of it took place on October 20. That details pretty much every aspect of the system that you could want to know as an emitter, when exactly you're going to be receiving your allowances, when the auction dates are. Those are all set years ahead of time. Two auctions will take place next year already, so allowances will be brought into circulation ahead of time. So, as an emitter, I would think that you would be pretty prepared for what's hitting you with this program.
Monica Trauzzi: So, despite the passage of this program, we haven't really seen a big groundswell of interest throughout the country. Is California still seen as a potential model for what the U.S. Could look like in terms of carbon trading or has that idea sort of shifted?
Elizabeth Zelijadt: I'm not sure about the U.S., but in terms of global significance, California is pretty large. This market would be maybe a fifth the size of the EU emissions trading system and it depends on which other members of the Western Climate Initiative, which California is part of and the biggest member of, would join. Several of the Canadian provinces have passed their own legislation to create an emissions trading system that would then link to California. So the system, overall, could actually grow to be much larger. So, all eyes are on California in terms of going first and then the program as a whole under the WCI, the Western Climate Initiative, could actually get much larger. And in terms of eyes of the rest of the world on California, also with the aspect looking at reduced deforestation, that's one of the offset types that California is considering allowing, the credits from avoided deforestation, for compliance in the program. And a lot of countries, tropical forest nations in particular, are very interested in generating those types of offsets. So, they're watching California's policy developments on that front.
Monica Trauzzi: So offsets, they've always been a major point of contention when it comes to these talks. Beyond the avoided deforestation offsets, what other offsets are they looking at?
Elizabeth Zelijadt: There are four types that the regulations that were adopted in October currently allow. That's urban forestry, national forestry in general, agricultural biodigesters, so effluent from the waste, and ozone depleting substances, so the destruction of those. They have very high global warming potential. So for those four types, we have some projections on the volumes involved there, but those are the types that are allowed and emitters are allowed to use up to 8 percent of their compliance obligation through offsets. In other words, if they have a compliance obligation of 100 million tons, that's what they emitted in the last year, 8 million of those tons can be offsets.
Monica Trauzzi: Let's talk about carbon pricing. We've seen the price of carbon plummet in Europe due to their economic situation. What are the expectations for California and how that might be affected by what's happening in Europe?
Elizabeth Zelijadt: Not very much affected by what's happening in Europe. In fact, the forward trading on the two exchanges that are currently offering CCAs, California Carbon Allowances, those prices have ranged between-they started in September, well, late August trading and those prices have ranged between about $18 to $22 since then. And now they're down towards the $18 range and that's much higher than EUAs, European Union Allowances are selling for currently in Europe. The price there is about €10.40. So it's interesting that actually California prices are higher than European carbon. A ton is a ton all the way around, but the prices are actually higher in California at this point.
Monica Trauzzi: How much of an issue do you think it is for industry, this idea of a fragmented patchwork throughout North America of carbon markets? How difficult is it for industries to comply when there are so many different ideas basically around North America?
Elizabeth Zelijadt: Well, when California's enter into force, there will really be two carbon markets, the Regional Greenhouse Gas Initiative on the East Coast, which the tons there are trading at much lower prices right now and it only covers the electricity sector. It's really an entirely different program. And then California's, which, as I said before, might actually link to some Canadian provinces and possibly other U.S. S U.S. states that are members of the Western Climate Initiative in the future. So, we'll see how that pans out.
Monica Trauzzi: Durban, South Africa, a big conference coming up. Expectations are on the low side, probably fair to say that. Does the California decision have any impact on that? Does it add fuel to the potential outcomes of that meeting?
Elizabeth Zelijadt: Well, at the last conference in Cancun, I believe California actually had a small delegation that they sent to the talks, looking at what other countries are doing in light of their own program. This year, in terms of the U.S. position, I'm not sure California's activities are of too much importance. But, again, this issue of offsets and the reduced emissions from deforestation and forest degradation, they're a very hot topic in Durban and they're actually one of the issues on which the negotiators have been able to make some progress. They've tried to set some standards and some guidelines for how you could create either a market for these reduced emissions from avoided deforestation or at least some sort of payment system from rich countries to poor countries to facilitate the preservation of forests. And because California has declared that it might allow these credits, it's going to be interesting to see what happens in Durban in terms of if they make progress on solidifying what those credits could be and who could use them for compliance.
Monica Trauzzi: All right, we're going to end it there. Thank you for coming on the show.
Elizabeth Zelijadt: Thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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