By David Boles

The Californian cap and Trade started with a staff report at the air resources board as an Initial statement of Reasons Staff report on the 16^th December 2010. The cap and trade sets its targets out to reach 1990 emission levels by 2020, followed by a 80% GHG reduction by 2050. The program is set to begin by 1^st January 2012. California is joining forces with 6 other western U.S states and 4 Canadian provinces to form the Western Climate Initiative. The reasons for the regional cap and trade is that GHG mitigation as a whole will cost less than if California acted alone. The Air Resources Cap and Trade have gone to great lengths to ensure there is no Carbon leakage. This simply refers to entities relocating to regions that are not governed by the cap and trade system.

The Air Resources board (ARB) are in the enviable position where they can learn from the mistakes made by other cap and trade systems such as the European Union Emission Trading Scheme (EU-ETS). An example of this would be the over allocation of free allowances through a grandfathering mechanism. Entities in the EU-ETS received massive windfalls through free allocations while they passed on the 'opportunity cost' to consumers. The ARB seeks to overcome these fundamental problems through a mixture of allowance auctioning and free allocation based on emission efficiency benchmarks with updating output measurements. The updating output measurement will be a major improvement on the EU-ETS as it will allow the cap and trade to evolve and take into account economic downturns. A similar mechanism in the EU-ETS would have rendered the system far more efficient, avoiding the massive surplus that was caused by the global economic downturn in 2008.

The ARB has proposed to allocate allowance value to four different categories in order to sustain and promote the Cap and Trade System:

1. Enhancement of Market Operation- This involves putting aside a certain percentage of allowances in an Allowance Price Containment Reserve to enhance market operation by keeping allowance prices within a predetermined desirable range. In addition a set aside for forward auctioning to create a transparent long term signal.
2. Protection of Utility Customers and Other AB32 Purposes, Allowances assigned to utilities will be auctioned and the proceeds used to protect Californian ratepayers against opportunity costs.
3. Protection of Industry and Leakage Prevention- Allowances will be used to smooth the imposition of a carbon price on Californian Industry and minimize leakage.
4. Protection of fuel provider Customers- A proportion of the allowances will be auctioned directly to ARB. This will increase over the years of the program as distributed fuel use is covered and the levels of free allowances to Industry are reduced. The main purpose of this is to protect the man on the street from any adverse impacts of the program.

The Illustration below shows the proposed distribution of Cumulative Allowance Value:

Although I have only lightly touched on the Cap and trade program to be adopted in California and other States in the Western Climate Initiative, the program is very commendable and it is great to see that they have learned and implemented strategies to overcome difficulties experienced by their predecessors.

Other News:

• GreenX will resume spot Emissions Trade on the 11^th April after the cyber attacks on the Czech Republic Registry on the 19^th January.
• The European Commission seek earlier Auctions for Phase 3 Allowances.
• Chinese seek to peak emissions by 2030 according to recent Government Report.
• The Japanese Government are to rethink 2020 emission targets according to two Governmental ministers.

Source: http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm

By David Boles

The Californian cap and Trade started with a staff report at the air resources board as an Initial statement of Reasons Staff report on the 16^th December 2010. The cap and trade sets its targets out to reach 1990 emission levels by 2020, followed by a 80% GHG reduction by 2050. The program is set to begin by 1^st January 2012. California is joining forces with 6 other western U.S states and 4 Canadian provinces to form the Western Climate Initiative. The reasons for the regional cap and trade is that GHG mitigation as a whole will cost less than if California acted alone. The Air Resources Cap and Trade have gone to great lengths to ensure there is no Carbon leakage. This simply refers to entities relocating to regions that are not governed by the cap and trade system.

The Air Resources board (ARB) are in the enviable position where they can learn from the mistakes made by other cap and trade systems such as the European Union Emission Trading Scheme (EU-ETS). An example of this would be the over allocation of free allowances through a grandfathering mechanism. Entities in the EU-ETS received massive windfalls through free allocations while they passed on the 'opportunity cost' to consumers. The ARB seeks to overcome these fundamental problems through a mixture of allowance auctioning and free allocation based on emission efficiency benchmarks with updating output measurements. The updating output measurement will be a major improvement on the EU-ETS as it will allow the cap and trade to evolve and take into account economic downturns. A similar mechanism in the EU-ETS would have rendered the system far more efficient, avoiding the massive surplus that was caused by the global economic downturn in 2008.

The ARB has proposed to allocate allowance value to four different categories in order to sustain and promote the Cap and Trade System:

1. Enhancement of Market Operation- This involves putting aside a certain percentage of allowances in an Allowance Price Containment Reserve to enhance market operation by keeping allowance prices within a predetermined desirable range. In addition a set aside for forward auctioning to create a transparent long term signal.
2. Protection of Utility Customers and Other AB32 Purposes, Allowances assigned to utilities will be auctioned and the proceeds used to protect Californian ratepayers against opportunity costs.
3. Protection of Industry and Leakage Prevention- Allowances will be used to smooth the imposition of a carbon price on Californian Industry and minimize leakage.
4. Protection of fuel provider Customers- A proportion of the allowances will be auctioned directly to ARB. This will increase over the years of the program as distributed fuel use is covered and the levels of free allowances to Industry are reduced. The main purpose of this is to protect the man on the street from any adverse impacts of the program.

The Illustration below shows the proposed distribution of Cumulative Allowance Value:

Although I have only lightly touched on the Cap and trade program to be adopted in California and other States in the Western Climate Initiative, the program is very commendable and it is great to see that they have learned and implemented strategies to overcome difficulties experienced by their predecessors.

Other News:

• GreenX will resume spot Emissions Trade on the 11^th April after the cyber attacks on the Czech Republic Registry on the 19^th January.
• The European Commission seek earlier Auctions for Phase 3 Allowances.
• Chinese seek to peak emissions by 2030 according to recent Government Report.
• The Japanese Government are to rethink 2020 emission targets according to two Governmental ministers.

Source: http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm