California carbon market in turmoil amid permit glut and court claim

California’s cap and trade program for carbon emissions faces an uncertain future, Reuters reported on Thursday (June 16), due to a mix of market turbulence, legal and political challenges.

The US state on Tuesday announced that it had raised just USD10 million in revenues from the May carbon permit auction, around USD500 million less than it brought in during the February sale.

According to California Air Resources Board data, at the May auction only a small percentage of the allowances offered were sold, around 11 percent of current allowances and 9 percent of future allowances (both traded at USD 12.73).

The weak demand for auctioned carbon permits is due to free allocations that oversupplied the primary market, making more convenient for traders and operators to buy allowances on the secondary market, experts observed on Carbon Pulse. The system is designed to adjust such dynamics by temporarily setting aside unsold allowances in a state reserve, in addition to a progressively declining cap, Carbon pulse points out.

California’s program has been linked with the Canadian Province of Québec’s cap-and-trade system since 2014. In 2015 the California/Quebec market experienced a rapid growth of carbon trading mostly due to the fact that it expanded its scope to include transport fuel emissions. This alone increased the emission coverage from 165 Mt to 403 Mt, according to the study Carbon Market Monitor 2016 by Thompson Reuters. The increased number of allowances in the primary market created more liquidity that spilled over and generated more trading also in the secondary market.

The second challenge comes from a lawsuit launched by the California Chamber of Commerce, arguing that the state’s quarterly carbon auctions amount to an illegal tax on companies. The court decision on the case is expected by the end of this year.

According to Reuters, California’s Governor Jerry Brown acknowledged uncertainty about the post-2020 continuation of the program and said he has yet to work out a deal with the legislature to extend it beyond 2020.

Initiated in 2012 as a key element of California’s 2006 climate plan to reduce GHG emissions to 1990 levels by 2020, California’s cap and trade program covers approximately 85 percent of California’s emissions. In 2015 Governor Brown tried to extend the program into the post-2020 period via executive order (based on California’s 2030 target to cut emissions by 40 percent compared to the 1990 level) but the bill was blocked by the state Legislative Counsel, Reuters reported.

 

(Image: Downtown Los Angeles. Photo credit: Steve Boland/Flickr)