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Trading Carbon : November 2011
to $66/t by 2020. If the state of the economy is not the major factor affecting prices at the moment, what is setting price levels? "Initial price formation is down to policy uncertainty," said Forrister Advisory's Forrister. He noted the potential for legal challenges to the scheme from both industry and environmental justice groups. The latter have already contested the programme in the courts, but, as yet, have been unsuccessful in stopping ARB from moving forward. "Other decisions out there related to pricing are what other offset methodologies will (ARB) adopt and more linking rules to make it more attractive to participate," Forrister said. ARB has so far approved four methodologies to develop projects that generate offsets eligible for the programme and is considering at least three more. The October analysis by Thomson Reuters said that "limited offset supply remains a primary price driver". For example, if ARB approves additional offset methodologies in the next 12 months its average price forecast could fall to $30/t of CO2. The system's offset market is also complicated by liability rules for carbon credits that could be deemed invalid by the regulator in the future. In September, ARB cut invalidation liability to three years from eight, providing offsets are verified twice. But the rules are still far from perfect for market participants. "Offset liability is a little better. But it is still a model that is untested and that will ricochet into the offset market," said Forrister. l less heavy industry (than Europe) ... (and so it) is much less emissions intensive than the EU," he said. Thomson Reuters' Mazzacurati agreed. "California has been a leader in energy efficiency since the 1970s and has succeeded in flattening its emissions growth, even when its economy and population was growing," she said. Although weaker economic activity would likely "drive emissions down" in the state compared with the EU, it would "probably be a dampened impact because there is less industry", she added. The effect of carbon cap-and-trade on the country's economy was a big factor in blocking legislation that would have introduced a federal system across the US last year. So could a deeper recession cause California's politicians to rethink its ETS? "I don't sense that they are worried about having to soften the programme because of a recession," said Forrister. "California leaders are not that worried about hurting economic growth. They are at the other end of the spectrum; they think this (programme) will spur economic activity in clean energy," he said. "California has always been environmentally focussed," said John Hodges, founder and president of US-based emissions reduction project developer SunOne Solutions. "From the policy side, the new governor is very supportive and last year's referendum was clearly in favour -- it actually won by the biggest margin of any referendum," he said. In November 2010, California went to the polls to vote on, among other things, so-called "Proposition 23". If the proposal had been passed, it would have effectively blocked the introduction of legislation to limit GHG emissions in the state. However, the proposition was defeated by 60 percent to 40 percent. The same vote saw Jerry Brown elected as governor of California. He had previously been state governor in the late 1970s and early 1980s. And, according to Forrister, during that period Brown was responsible for setting in motion many of California's energy efficiency and renewable energy policies. "I can't believe that he would let (the GHG reduction plans) fall on his watch," Forrister said. Thomson Reuters' Mazzacurati agreed that Brown was not likely to "backpedal" on the goal of reducing emissions. "If he were to make any changes, which are very unlikely at this point, it would be to impose a carbon tax and strengthen direct regulation (of GHGs)" she said. A Thomson Reuters assessment put California carbon prices at about $19.5/t of CO2e, as Trading Carbon went to press in mid-October. The company forecasts an average price of $14/t in 2013, the first year of the programme, rising 17 NORTH AMERICA Initial price formation is down to policy uncertainty Dirk Forrister, Forrister Advisory California cap-and-trade programme emissions, cap and price projections 2013 2014 2015 2016 2017 2018 2019 2020 Emission forecast (Mt of CO2e) 162 161 383 378 373 368 362 357 Net cap (Mt of CO2e) 160 157 378 366 355 332 321 310 Emissions to cap (Mt of CO2e) 1 3 6 12 19 36 41 47 Price assessment ($/t) 14 17 22 27 34 42 53 66 Source: Thomson Reuters November 2011 REUTERS/BRENDAN MCDERMID
December - January 2011