Cap and Trade Has Come To Be in California

Consider it a birthday of sorts.  Yesterday, California launched their first "Cap and Trade" market by auctioning off allowances in the California Carbon market.  This, while just being California, actually becomes the world's second largest carbon market right behind all of the European Union.

While right now it essentially only applies to major refineries and electric plants the day is coming when it will apply to transportation fuels.  My personal recommendation is the industry should get prepared to deal with this inevitability rather than fight it.  Politics aside, what we have found is what generally starts with the California Air Resource Board (CARB) moves across the Nation fairly quickly.

The Wall Street Journal reports on this launching and reports California expects to raise $1bl in 2012 and $2.8 to $11bl by 2015.  A critical factor for success is we have to ensure this money goes to actually reducing emissions or offset projects rather than the general coffers of the state.  If we can avoid the "money grab" then this will be a very effective way to use market incentives to lower emissions.

 According the the California auction site, the results will be listed on November 19, 2012. Auction information can be found at the CARB auction site.

EU Freezes Carbon Charge on Airlines

Many know the EU was going to charge a carbon emissions charge on any airline flying in the EU airspace - this included foreign airlines.  Of course, this caused a furor in international relations and the US actually passed legislation (prior to the election) preventing US flagged air carriers from implementing this charge.

Now, the EU has agreed to "freeze" this for a year.  This is an interesting development and one which I am sure is designed to bring "peace".  I am just not sure what they are waiting on?  What will really be different next year than this year?

Cap and Trade Launches in California

It is finally here in the United States with California launching their carbon market on November 14th.  On November 14th, California Air Resource Board (CARB) will launch the selling of 21.8 million carbon allowances to be bought by stationary carbon emitters (plants, utilities etc.).  Distributors of transportation fuels and natural gas will come in 2015.  

This offset mechanism is supposed to have the desired effect of putting a market mechanism in place which will allow rules of economics to force companies to either lower their carbon emissions or pay a price.  Presumably, the price will get high enough where there can be business cases made to implement new technologies or new conservation programs which will drive down the emission of green house gases.  The ultimate goal is to get CO2 down to 1990 levels even with presumed growth of the economy.  

To give an idea of the pricing mechanism below is a graph from Point Carbon which reflects the prices, per metric tonne, of CO2 allowances currently trading in the very illiquid California market. 

Source: Point Carbon

You can see the carbon allowances are trading on the low end of the scale.  The point of injecting the allowances by the state is to give a shot of liquidity to the market to get the market functioning better.  Best estimates are they will sell for between $10 - $12 per metric tonne and we will see on November 14th how it all pans out. 

This mechanism is similar to the European market already in place and this will make the California market the 2d largest market in the world. 

Like it or not, I think the evidence is clear:  1) CO2 is causing climate change. 2) Human activity is producing excess CO2 3) We must reduce CO2.   Given all of this using rules of economics to create a market which "prices" bad environmental behavior is the right way to go.  People will either have to pay the price and continue the bad behavior (that money would be used by others to clean up after the bad behavior person) or they will use the economics to create business cases to create projects to fix / lower their carbon emissions.  

The issue here of course is anytime the government creates a "currency" out of thin air their is huge opportunity for abuse.  However, there are mechanisms to solve that abuse potential, or at least make it not in their best interest to execute the potential corruption, and those mechanisms should be researched, implemented then fine tuned before we decide to end what will be a great program. 

Of course, this will come with the obligatory law suits on both sides so we will wait and see how this all turns out.  Bottom Line: If you are a transportation provider or transportation user you should watch this closely because in 2015 it will impact your business.  You will be participating either directly or indirectly.