CCA market could rebound, despite lingering concerns

The California carbon market could rebound from a sluggish 2016 — assuming it survives the new year.

Environmental justice groups that have growing clout in the state have called for an end to California's cap-and-trade program to reduce CO2 emissions. In addition, a state appeals court is set to decide whether the cap-and-trade program's auctions are illegal.

But market participants and analysts expect prices for California Carbon Allowances (CCAs) to rise in 2017 as an existing oversupply shrinks, which could help to restore confidence in the program. Supporters in the state legislature, meanwhile, may move to address legal issues that may be scaring off some from participating in the trading market.

San Francisco-based energy and environmental policy firm Energy Innovation expects the program to shrug off the challenges, citing stronger interest in the last of the four quarterly CCA auctions of 2016 as an indicator of what is to come. The final auction of 2016, held in November, sold 88pc of the CCAs offered, up from 35pc in August and just 11pc in May when concerns about the oversupply and legal uncertainty were at their peak.

Higher interest could carry into 2017 because covered entities still need as many as 95pc of the allowances that have yet to be distributed to meet their obligations under the cap-and-trade program, according to the firm. In addition, the fact that the auction reserve price will continue to rise each year, could make the sale more attractive.

"Emitters have an incentive to buy early, as long as prices are at the floor. In light of this, I would expect an average of at least 80 percent of offered allowances to be sold and perhaps higher," Energy Innovation director of research Chris Busch said.

This year's auction reserve price is set at $13.57/metric tonne and could rise to above $14.45/t in 2018 if inflation remains in line with 2016. The price rises each year by 5pc plus the rate of inflation for urban consumers.

Consulting firm Alpha Inception also anticipates stronger auction results in 2017. Andre Templeman, the firm's managing director, says that CCAs are likely to pass the $13.57/t reserve price at some point this year as auctions again sell out.

That would represent a change from 2016. December-delivery CCAs spent much of the spring and summer below last year's $12.73/t auction price — a market first — as the oversupply and uncertainty about the program's future during a legislative review reduced buying interest. The court challenge added to the market concern.

While the December-delivery CCAs climbed back above the auction price in the latter half of the year, they ended 2016 at $12.90/t, about 30¢ lower than where they started.

A resolution to the auction lawsuit could come relatively early this year. The state's Third Appellate District Court will hear oral arguments on 24 January. It is then required to issue a decision within 45 days.

If the state Air Resources Board (ARB) loses the challenge, the path forward is uncertain. The California Chamber of Commerce has suggested that the court block only the state's portion of the auction, leaving allowances from utilities and others available for sale. Other plaintiffs have asked the court to freeze all auctions and consider issuing refunds. The groups say the auctions constitute an illegal tax under state law. The 2006 legislation that authorized the cap-and-trade program, AB 32, did not clear the legislature with a two-thirds supermajority that tax increases must garner.

At the same time, ARB is updating its scoping plan for meeting California's emissions targets, with an eye toward extending the cap-and-trade program to achieve a 40pc reduction from 1990 levels by 2030 mandated by the legislature last year.

But as the agency drafted its recommended path forward, members of the environmental justice community called for ending the cap-and-trade program in favor of pursuing direct emissions cuts at regulated sources.

The agency wants instead to extend the cap-and-trade program for another 10 years and add or strengthen other measures to meet the 2030 target. But it has also proposed two other options, one of which is in line with recommendations from the environmental justice community.

The alternative paths at this point seem irreconcilable, says Jon Costantino, principal at Tradesman Advisors, an environmental policy and regulation advisory firm. "The environmental justice community's recommendation to remove cap-and-trade is in direct opposition to ARB's regulatory direction right now," said Costantino, who previously managed the agency's climate change program.

A solution could come from the legislature. Templeman says a bill this year could affirm the extension of the cap-and-trade program to 2030 while also addressing other issues such as allowance allocations and offset provisions.

ARB, meanwhile, says it will take the concerns of all of its various stakeholders into account in the final scoping plan for 2030.

The agency says the plan "will be an effort to balance all these suggestions and concerns," including public health, community impacts and environmental impacts.

Article by Argus Media.