Archive for the ‘Carbon Markets’ Category

One Casualty of the Economic Crisis: The European Cap-and-Trade System

Photo by Takver. Some Rights Reserved

Photo by Takver. Some Rights Reserved

The price of European carbon emission certificates has plummeted in the aftermath of the global economic crisis. This week the European Parliament narrowly voted down a bill designed to prop up the price per ton of carbon emissions in an attempt to keep the once-lauded program financially viable.

Cap-and-Trade has always seemed a jury rigged method of dealing with the principal driver of global climate change. A straightforward carbon tax would be a more transparent external cost but the political challenges of instituting such a tax have largely kept it off the table. The political difficulties have been compounded by the challenge of implementing carbon taxes globally – which country wants to walk into the propeller first? Cap-and-Trade at least had the virtue of being fungible; emissions banked in one country could be spewed out in another corner of the world.

Climate policy expert Felix Matthes, of the Institute for Applied Ecology, sat down to talk with Spiegel Magazine about the stark implications of Parliament’s decision, which he sees as the death knell for EU-wide emissions reduction. The ironic result, he says, will be a return to a national, rather than regional, approach to carbon reduction with serious consequences for global efforts to reign in emissions. Noting that while right wing politicians hope to undermine climate change policy entirely, and those on the left seek more regulatory protection, he still believes carbon trading is the most fruitful means of dealing with the global reach of carbon emissions. Unfortunately, the dramatically reduced energy consumption and industrial output following the economic crisis, combined with a glut of credits from China, have resulted in a flood of certificates on the market and a corresponding precipitous decline in their price.

California Cap-And-Trade Kicks Off

Let’s hope this doesn’t represent the future of California’s cap-and-trade system. Photo by Chuck Coker, some rights reserved.

Starting next Tuesday, 350 California companies will begin to pay for their emissions. The New York Times has a piece on the decisions these companies are faced with and how industries will be affected.

The Global Warming Solutions Act of 2006 directs the state’s Air Resources Board to operate a cap-and-trade system. At the end of 2014, the 350 companies to whom the system initially applies will present allowances for each ton of emissions from 2013. Most of these credits have been granted for free, but the number distributed will decrease quickly over the next five years. The goal is to reduce emissions to 1990 levels by 2020, and to structure incentives so that investment in energy efficiency both cuts costs and reduces emissions.

Regulators are trying to be sensitive to industry concerns. The rules are fine-tuned for each industry to avoid imposing severe economic hardship, but they walk a fine line with making the rules ineffective. However, the New York Times gives the example of the tomato industry, whose high-emissions processers fall under the law’s first round of emitters. The industry is wary of going the way of California’s garlic industry, which lost half its market to Chinese imports in less than ten years.

California wants to show that a cap-and-trade system can work in the U.S., but they also fear that if their industries lose a competitive edge, other states will be even more wary of adopting a similar approach. On the other hand, the more allowances are passed out for free, the less effective the system is in reducing emissions.

Many economists say that more important than the cost effects of the emissions allowances is if the market for the emissions credits produces a stable price – which would inform companies on the relative costs of emitting and investing in cleaner technologies.

H.Con.Res. 142: The “Well, They’re Not Doing It, So Why Should We?” Bill

One of the most discouraging parts of trying to get U.S. citizens, as a nation, to reduce carbon emissions, is that it evokes the same kind of response as attempts to get individuals to, say, lower their water usage. Why should you let your lawn go dry, if the guy across the street is watering his plush green lawn like crazy?

If only we could get behind the idea of leading by example.

The Hill has a post on a GOP resolution “expressing the opposition of Congress to Federal efforts to establish a carbon tax on fuels for electricity and transportation.” One argument from the Republicans? “[A] carbon tax in the United States will have no impact on China, India, and other major sources of carbon emissions throughout the world.”

Read the full story here.

California Cap-and-Trade Goes International

Photo by Mike Baird. Some rights reserved.

California’s cap-and-trade program, known as “AB32,” is moving closer to its first binding auction. Mandated as part of California’s Global Warming Solutions Act of 2006, it requires greenhouse gas emissions in California to be reduced to 1990 levels by 2020 and to 80 percent of 1990 levels by 2050.

Recently, the state modified its greenhouse gas / carbon trading market to expand the reach of the program, proposing a formal link between the AB32 cap-and-trade system and a similar program in Quebec. The link, they expect, will expand participants’ trading options and increase liquidity in carbon markets. K&L Gates has a brief analysis of the linked system here.

The programs are similar in many ways. California’s program will at first cover 360 businesses responsible for 85% of the state’s greenhouse gas emissions. In 2013, the regulations will apply to industrial polluters, and in 2015 to distributors of transportation fuels, natural gas, and other fuels. Its credits were designed to integrate with other cap-and-trade programs. Quebec’s market will include 75 companies mostly in aluminum and mining industries beginning in 2013 and include a much larger group of companies in 2015, aiming to reduce greenhouse gas emissions to 20 percent below 1990 levels by 2020.

A joint press release from California and Quebec expresses their expectation that other regions involved in the Western Climate Initiative in North America, especially Ontario and British Columbia, may soon connect their trading schemes with California and Quebec’s, possibly rivaling the European Union’s in size eventually.

The California Air and Resource Board will hold a practice auction in August 2012, and a joint auction with the Quebec market is scheduled for November 14, 2012.

The Green Mien has covered at least one interesting objection to California’s cap-and-trade system: environmental justice groups opposing its “industry-preferred” approach that does not mandate reductions, ignoring that polluters are disproportionately located in low-income, minority communities.

The Economics of Hype: Rio+20

Photo by Ivan Herman. Some rights reserved.

In June, the UN Conference on Sustainable Development will be held in Rio de Janeiro, Brazil. Known as Rio+20 because it aims to address similar issues to the 1992 Earth Summit in Rio, its official discussions will focus on building a green economy to lift people out of poverty and improving international coordination for sustainable development.

Environmental Finance highlights the opportunities the conference will create for investors. Increased attention to Rio+20’s issues will focus public scrutiny on sustainability and countries’ policies, generating what Citigroup’s analysts call “green sentiment” in the markets. In addition to its effects on investment, media coverage might increase pressure on politicians to strengthen climate policies.

To illustrate this possibility, the analysts suggest that European politicians might leave the conference embarrassed about the low price of carbon dioxide permits in Europe and seek to raise prices through legislation back home. This would stimulate the carbon dioxide market and boost the low-carbon investments that depend on it, especially those made by alternative energy companies.

The U.S. wind industry, for example, depends heavily on government support, and is in the trenches of a campaign to pressure Congress to extend the production tax credit that expires at the end of this year (see our post on the topic here). Increased visibility of climate change on the global agenda could propel the issue, causing major uncertainty in the industry, to the top of legislators’ concerns.

Finally, Citigroup’s analysts say that sustainability reporting will boost engagement between companies, governments, and activists. At the very least, there will be a lot of journalists willing to go to Rio on business.

A Trade War at 30,000 Feet

Will the F22 Raptor be subject to the ETS? Photo by Mark Kent. Some rights reserved.

The U.S. joined twenty-three other nations on Wednesday in signing the so-called Moscow Joint Declaration to protest the EU’s Emissions Trading Scheme (ETS), which in 2008 was extended to include aviation. It is the latest show of American opposition to the scheme, following a joint letter from the U.S., Canada, and Mexico to the International Civil Aviation Organization that we covered in 2010, and a bill passed in the House last year that prohibits airlines from participating in the ETS. Some of the other signing nations – which include China, Russia, India, Japan, and Saudi Arabia – are considering similar legislation.

The Emissions Trading Scheme, or ETS, is a declining cap on emissions for airlines, with allowances initially distributed based on the sector’s emissions in 2010. Eighty-two percent of the allowances will be given to airlines for free, 15% will be auctioned, and 3% reserved for new or fast-growing airlines. The cap will be reduced gradually to the average level from 2004-2006. Under such a scheme, airlines can choose the best way to meet their emissions obligations, either altering their operations or paying others to reduce their emissions by buying more allowances.

Wednesday’s Joint Declaration disputes the EU’s authority to regulate flights over international or other countries’ airspace. In response, the EU points to the Chicago Convention on international air regulation, which states that regulations must apply equally to all airlines regardless of their nationality. The Joint Declaration also echoes some of the U.S. House bill (which the Green Mien covered here), objecting that the EU’s action might jeopardize the prospects for coordinated international action. The EU has said it will scrap its program if a multilateral alternative comes around.

Is there a way forward? The aviation industry says it will lose $3 billion per year, so we can expect their continued opposition. Environmental advocates and sympathetic governments (including most of Europe, apparently) will point to the International Panel on Climate Change estimates that the aviation sector is responsible for 3.5% of climate change, and to the projected 183 million tons of CO2 reduced per year by 2020. While many governments opposing the ETS support an international solution administered by the International Civil Aviation Organization, the branch of the U.N. that coordinates international standards and procedures, it has been debating such a plan for more than a decade, with no emissions reduction scheme to show for it.

The possibility of a carbon trade war looms, and the Joint Resolution indicates that many countries are willing to start one. Signers of the Resolution stated their willingness to coordinate in retaliatory actions against European airlines that fly internationally, like Air France and British Airways, and Russia is threatening to resume charging airlines for flight routes over Siberia, a practice it abandoned recently. Their goal: to postpone or cancel the ETS.

Environmentalists vs…Carbon Cap-and-Trade?

Photo by West Point Public Affairs. Some rights reserved.

A recent Update from ML Strategies (a consulting affiliate of law firm Mintz Levin) tipped us off to an interesting case that pits California’s proposed carbon cap-and-trade system against two environmental justice groups.

Environmentalists were largely united in their excitement over the passage of California’s Global Warming Solutions Act (more popularly known as AB 32), which was signed into law by Governor Schwarzenegger in 2006. The Act directed the California Air Resources Board (CARB), to develop regulations and market mechanisms that would help the state meet its goal of a 25% reduction in greenhouse gas emissions by 2020.

However, the cap-and-trade program that CARB proposed as part of its implementation of AB 32 created a sharp rift among those environmentalists. While many were elated to see the plan take shape, some saw the cap-and-trade program as the “industry-preferred” approach – one that does not require polluters to reduce emissions, rather allowing them to buy “reductions” from other polluters. Opponents of cap-and-trade argue that these polluters are “disproportionately located in low income communities of color.” A 2010 study by the University of Southern California affirms this argument.

In 2009, a group of individuals, along with attorneys from the two environmental justice groups, Center on Race, Poverty & the Environment and Communities for a Better Environment, filed a lawsuit against CARB, arguing that it had violated the California Environmental Quality Act (CEQA) when it failed to analyze and consider alternatives to the cap-and-trade program prior to implementation of AB 32.

(It’s interesting to note that representatives from both the Center on Race, Poverty & the Environment and Communities for a Better Environment sit on CARB’s Environmental Justice Advisory Committee, though perhaps this speaks to the limited influence the Committee ultimately has on CARB’s implementation plans.)

Less than two months ago, a San Francisco Superior Court judge ruled in favor of the petitioning environmental justice groups, and enjoined CARB from any further implementation of AB 32 until it “has come into complete compliance with its obligations under its certified regulatory program and CEQA.”

Pursuant to the judge’s decision, the petitioners were ordered to submit proposed documents (“Writ of Mandate”) to finalize the Court’s order. As explained in the accompanying letter, these proposals limit the scope of the injunction to include only the development and implementation of the cap-and-trade program, in order to allow “the good part” of AB 32 to move forward.

CFTC Releases Report on Oversight of Carbon Markets

By now, many of you have heard that the CFTC has released, on behalf of the Interagency Working Group for the Study on Oversight of Carbon Markets, the report mandated by Section 750 of the Dodd-Frank Act (you can skip to page 374). But have you read it?

According to E2 Wire, the report stresses that carbon markets will “function best if they’re open to a wide range of actors — as long as tough oversight is in place.” The working group’s summed-up recommendations for such oversight? “Rely on the existing regulatory oversight program, as enhanced by the Dodd- Frank Act,” and “ensure that appropriate oversight mechanisms are in place for primary and secondary allowance and offset markets.”

In addition to the CFTC, the working group that put together the report is made up of representatives from FERC, EPA, CFTC, SEC, and even FTC. Collaboration like this showcases the curious terrain to be traversed when energy and environmental law intersect with the world of financial law and market regulation. Consider this multi-faceted report representative of some of the more interesting things to be found on knowledgemosaic – from climate change risk disclosure in SEC filings to regulations detailing FERC authorization of public utility issuances of securities. As knowledgemosaic continues to broaden its content, access to these fascinating expressions of industry and agency interconnectedness will only grow.

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