What could next month's California carbon allowance auction mean for the future of the state's cap-and-trade program? During today's OnPoint, Gary Gero, president of the Climate Action Reserve, discusses the prospects for the auction and its impact on businesses in the state. He also talks about California's discussions with China, the European Union and Australia on linking cap-and-trade systems.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Gary Gero, president of the Climate Action Reserve. Gary, it's nice to have you back on the show.
Gary Gero: Delighted to be here again, thank you.
Monica Trauzzi: Gary, as California prepares for its November auction of carbon allowances, there is some skepticism about the pricing of allowances. If the pricing is lower than expected and some entities don't get into the game early because of some uncertainty, what do you think the overall impact on the program could be?
Gary Gero: I think that that's a contingency that the state is well prepared for, but, frankly, I don't think that's likely to be the case. If compliance entities don't buy up those credits, I know for a fact that noncompliance entities, banks, hedge funds, other investors, have the opportunity. And if you can buy a California credit at $10 today and bank that for the future, I think there's going to be plenty of people who will take that opportunity.
Monica Trauzzi: So, what are your expectations and predictions for how this auction will play out?
Gary Gero: I think the auction will go well. I think they're putting out a reasonable number of credits, some 60 million credits in total, which is not a huge number, but it's sufficient to get a real price signal, both for the current vintage year, the 2013s and in future vintages. I think there probably is some question about the 2015 vintages and whether people really have faith that the program will go full bore in 2015 as it's designed. So that one I think may have some question about whether or not all of those credits sell or all of them sell at something just slightly above the floor price, but I expect that at the end of the day we will be close to or just slightly above the floor price even from the 2015 vintages.
Monica Trauzzi: There's this idea out there of giving credits to companies at no cost. Why wouldn't that work and why isn't that a sound economic move for the state?
Gary Gero: Well, I think most of the credits are being given away to the companies at no cost, 90 percent of the credits already are being given away to companies. There's a couple of policy reasons why you don't want to give all of them away. The first is that you want to have real price discovery. What are the credits worth? Are we actually driving the kind of economic change that we want to? At the end of the day, the cap and trade program is a tool for achieving emission reductions. And sometimes we forget that there's a goal at the end of the day. In order to make sure that you're achieving that goal, you want to see that prices are, in fact, driving some economic behavior. So that's the first reason to auction some of the credits. And the second is, frankly, it's a question of where -- a transfer of wealth. We've transferred 90 percent of the wealth essentially, the value of the credits to the companies. California wants to have some of that value so that it can use it in other areas to address AB32 needs and just this weekend the governor signed a bill that directs how some of those funds are used, including to disadvantaged communities. So that allows for the benefits, the value of the cap and trade program to be designed and specifically targeted to areas where if you had just given those credits away to the companies, you wouldn't necessarily see investment.
Monica Trauzzi: What about the overall impact on small businesses though? There are some businesses sounding the alarm saying that they're going to either go out of business or have to leave the state as a result of this program. How concerned are you that that's an actuality?
Gary Gero: I think the program is designed to only apply to the very largest companies. There's 350 companies in California that have a compliance obligation. In an economy bigger than that of Italy, the eighth largest economy in the world, 350 companies with a compliance obligation means that you're not getting down to those smaller companies. Those companies don't -- won't be facing any direct costs as a result of the program.
Monica Trauzzi: What is the status of Quebec's involvement? There's often been discussion about once they link into the program how many offsets they'll actually eat up. So at this point, what's their involvement and then how are things going to go moving forward?
Gary Gero: So, California and Quebec want to have a linked program and California would like to have a linked program much more broadly as well. California knows it's not going to solve climate change all by itself, so it's looking for partners and Quebec was the first partner who really stepped up and said we will join with you. Quebec, at this point the Quebec government has changed just recently. There were elections last month. They are evaluating their commitment to the cap and trade program as part of the overall climate strategy, but most observers will tell you that, in fact, if anything, they're going to go a little further and deepen the cap. But California had to make sure it got its market right first and so is developing and implementing the program to launch by itself on January 1 with the idea that it can link up with Quebec and others in subsequent years. And it could be as early as 2014 that Quebec is there.
Monica Trauzzi: And some of those others include Australia, the EU, China. Mary Nichols, the air chief, has indicated that she's going to be having conversations with all of these countries about potential linking up. Is it a little premature though to have these conversations when we don't know how viable the California plan is?
Gary Gero: Well, it's a little premature to talk technical details on how you link, but it's not premature from a political level to start the dialogue. You want to get the political buy-in as early as possible. But, yeah, I think you want to see a stable market operating in California. You want to see some local partners come in, whether it's Quebec or British Columbia or an Ontario or a Washington state for instance, a Colorado, start to develop a regional market and then we can look to the next step, to Australia and to Mexico and to Brazil and to China.
Monica Trauzzi: And we really are operating in sort of an era of regional carbon markets. Does that pose a threat do you think to a potential future of a unified carbon market? I mean because there is such a focus on the fragmented approach.
Gary Gero: I think it doesn't pose a threat. I think what it really does is it helps inform a national policy, a federal program. And China is actually following this path. You don't hear a lot about this in the general media, but seven provinces in China are moving forward with provincial level cap and trade programs, all designed differently, with the explicit purpose, as sort of laid out by the national government, that we're going to learn from those seven different approaches and create a better system. And that's what California is trying to do here as well. We're trying to say, look, here's one way of designing a cap and trade program. We happen to think it's a good way of designing it, but that helps inform a national policy. At a certain point, you get that patchwork where you get too many regional programs. And I think the goal for all of us is a national program. I don't think we in California want to run a state-level program for ever. We want to drive national and international policy.
Monica Trauzzi: All right, we'll end it there. A lot to watch over the next couple of months. Thanks for coming on the show.
Gary Gero: Absolutely, happy to be here.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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