California carbon to track low

Reuters

A glut of excess permits will keep California carbon prices low through 2020, reducing the revenue the state will raise from the sale of permits to its largest carbon-emitting businesses, according to a new analyst report.

The output of heat-trapping greenhouse gases from California’s carbon market partner Quebec was 12 per cent lower than anticipated last year, analysts at Thomson Reuters Point Carbon said on Thursday, which means prices for the linked market will hover just above the program’s auction floor price of $US11.34 a tonne this year.

As a result, California’s quarterly permit auctions will only raise $US21 billion for the state through 2020, far below the projections of up to $US60 billion floated by some analysts when the program launched in 2012.

Earlier this month, California Governor Jerry Brown released a 2014-2015 budget that proposed spending $US850 million of the program’s revenue on projects designed to reduce the state’s carbon footprint, including $US250 million on a controversial high-speed rail project.

Carbon allowance prices are expected to rise gradually in the coming years. The auction floor price is set at $US11.34 in 2014 and will increase by 5 per cent plus inflation every year. Thomson Reuters Point Carbon estimates the price floor will hit $US17 in 2020.

Despite the surplus of allowances, the rising floor price and a provision allowing businesses to bank excess permits for use in later years will keep secondary market prices slightly above the auction floor price through 2020, the analysts said.

Banking allowances and offset credits was popular during the market's first year, with firms stockpiling up to 25 million tonnes of credits last year, the analysts said.

Buyers have also shown increasing interest in purchasing permits covering emissions in future years like 2016, indicating that they believe the program won't be derailed by a lawsuit in the near term.

“That level of banking – plus the recent sellout of future vintage allowances at California auctions - suggests that California companies know the market is here for at least six more years” said Ashley Lawson, a senior analyst with Thomson Reuters Point Carbon. ”What they’re still looking for is some certainty about what happens after 2020.”

California policymakers are expected to release preliminary details of the post-2020 cap-and-trade program in the coming weeks. Officials have suggested that they will extend the cap-and-trade program out to at least 2030.