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Senate Bill 605 to double carbon prices

Reduction of offsets likely to raise the cost of compliance

Washington, 19 July 2013

A California senate bill which passed the state senate in May would reduce the offset supply of carbon credits by 85 percent, doubling allowance prices, according to analysis by Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.

Authored by Senator Lara, California State Senate bill 605 (SB 605) would ensure that monies designated to disadvantaged communities from allowance sales are always accessible to the State Controller. It also aims to keep and create in-state jobs through GHG reduction activities and to reduce local air pollution. However, the bill would limit the offset origin under the California cap-and-trade scheme to the State of California. SB 605 would cut offset supply by 85 percent, doubling WCI allowance prices to $28/t in 2013 and $134/t in 2020 compared to a business-as-usual scenario ($14/t in 2013 and $69/t in 2020).

“Doubling allowance prices would significantly impact compliance strategies already in place, affecting big and small emitters alike.” commented Olga Chistyakova, senior analyst at Thomson Reuters Point Carbon. “Without SB 605, there is already an offset shortage of about 25 percent against the maximum allowance limit, based on our offset supply assumptions. Under SB 605, forestry, livestock methane, and rice management will be the main sources of offset supply within the state, unless other protocols are added to complement them” continued Chistyakova.

Under this scenario, Thomson Reuters Point Carbon assesses a 69 percent likelihood that the price containment reserve (PCR) would be fully exhausted by 2020, compared to a 0.1 percent chance in a business-as-usual scenario. The market would be very short in compliance instruments, and many entities would be under increased financial burden when having to comply with the cap.

Although the bill’s key purpose is to ensure the State Controller has full power over a portion of revenues intended for disadvantaged communities in the Greenhouse Gas Reduction Fund, it would also restrict compliance offsets to those from California-based projects. The bill is scheduled to be heard in the Assembly’s Natural Resources Committee on August 12.

“We expect the offsets portion will be amended as it has encountered strong opposition from a large majority of stakeholders” said Chistyakova. “If it does pass, Governor Brown ultimately has the last word and could veto it. The bill’s support for California jobs and disadvantaged communities will make rejecting it a difficult decision for the Governor.”

Chistyakova concluded: “One solution could lie in­ developing and approving additional in-state offset protocols to allow for comparable offset volumes. However, we think it is unlikely California-based projects could generate enough offsets to come close to the 208Mt maximum allowable offset limit, since so many sectors are already mandated to reduce GHGs.”

 

Notes to Editors:

·         California’s cap-and-trade program initially covers only emissions from power generation and large industrial facilities. Compliance in these sectors began in 2013. Starting in 2015, the program will expand to cover emissions from the combustion of fuels, including transportation fuels. 

·         Price Containment Reserve (PCR): An account created by the regulator to control prices. It is filled with a specified number of allowances removed from the overall cap at the start of the California cap-and-trade program. This allows covered entities to purchase reserve allowances at specified tiered prices during quarterly auctions.


For further information, or if you would like to speak to one of our analysts, please contact:

Jake Hemingway 
PR Specialist, Thomson Reuters Point Carbon 
Mob: +44 (0) 207 542 5204 
E-mail: jake.hemingway@thomsonreuters.com 

Olga Chistyakova 
Senior Analyst, Thomson Reuters Point Carbon 
Mob: +1 301 275 5981 
E-mail: Olga.Chistyakova@thomsonreuters.com