california cap trade webinar 12 1 11
TRANSCRIPT
California’s cap-and-trade program:
What it means for the future of carbon markets
Michael Ball
Carrie Sisto
1December 2011
London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing,
Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hamburg and Johannesburg
Agenda
• AB 32
• The current landscape
• Compliance obligations
• Auctions and cost controls
• Offsets
• Linkage
• Potential changes and hurdles
AB 32
• Passed in 2006
• Cut emissions to 1990 levels by 2020
• The California Air Resources Board must set rules to
“achieve the maximum technologically feasible and cost-
effective greenhouse gas emission reductions”
• The board has authority to use market-based
mechanisms
Scoping plan
• Adopted in 2009, re-adopted in October 2011
• 2020 cap set at 427mn metric tonnes CO2 equivalent
(CO2e)
– 2020 allowance budget is 334mn mt CO2e in 2020
Mechanisms to achieve the 2020 cap
15.0
23.4
39.8
12.0
8.9
18.0
0 10 20 30 40 50
LCFS
RPS
Transportation
Energy efficiency
Other
Cap-and-trade
mn mt
California’s 2010 emissions by sector
Electric generators34.6%
Petroleum refineries
30.5%
Oil, gas production 11.3%
Cogeneration facilities
8.5%
General stationary combustion
7.1%
Cement plants5.1%
Hydrogen plants2.6% Other Industrials
0.3%
Covered CO2e emissions in California, 2010
Note: Does not include electricity imports or
emissions from the use of transportation fuels
Source: California Air Resources
Board
Cap-and-trade timeline
• Changes to adopted rules H1 2012
– Allocation methods
– Use of auction revenue
– Offset protocols
• Practice auctions H1 2012
– Auction, allowance account manager(s) still not selected
• First auctions August, November 2012
• Compliance obligation begins 2013
Emissions cap and allowance set-asides
Allowance
budget
Electric utility
share
Number of
offsets that can
be used
Containment
reserve
Advance
auction
Voluntary
renewables
2013 162.80 95.84 13.02 1.63 0.81
2014 159.70 94.09 12.78 1.60 0.80
2015 394.50 92.23 31.56 15.78 39.45 0.99
2016 382.40 90.37 30.59 15.30 38.24 0.96
2017 370.40 93.11 29.63 14.82 37.04 0.93
2018 358.30 92.23 28.66 25.08 35.83 0.90
2019 346.30 91.35 27.70 24.24 34.63 0.87
2020 334.20 90.37 26.74 23.39 33.42 0.84
Electric Utilities
• Point of regulation: electricity deliverers
• Allowances
– ~90pc of allowances allocated for free, based on historical
emissions
• 2013s allocated July 15 2012
• 2014-2020 allocated on November 1 of each calendar year
– IOUs must sell allowances at state-run auctions
• Spending rules being developed by CPUC
• Imports are included
– Specific plant or default emissions rate
Top-emitting electric utilities
Note: Based on default emissions rate of 0.428mt/MWh
Does not net out renewable energy imports or simultaneous exports
(mt CO2e) Direct IndirectPercent of free
allowances
Southern California Edison 2,354,482 11,427,585 34
Los Angeles Department of Water
& Power2,892,879 7,535,938 14
Sacramento Municipal Utility
District1,825,623 1,285,965 3
Pacific Gas & Electric 1,547,356 2,329,149 26
San Diego Gas & Electric 1,261,052 449,695 7
PacifiCorp 700,506 0.75
Source: California Air Resources Board
Top-emitting merchant generators/power
marketers
Note: Based on default emissions rate of 0.428mt/MWh
Does not net out renewable energy imports or simultaneous exports
(mt CO2e) Direct Indirect
Calpine 8,260,924 953,818
Iberdrola Renewables 2,597,946
Sempra Generation 2,163,495
La Paloma Generating Company, LLC 2,041,841
Dynegy 1,537,206
Elk Hills Power, LLC 1,396,453
Inland Empire Energy Center, LLC 1,312,153
High Desert Power Project, LLC 1,287,518
Sunrise Power Company 1,230,666
AES 1,205,478
WAPA - Sierra Nevada Region 1,180,922
Morgan Stanley Capital Group Inc. 1,117,907
Source: California Air Resources Board
Industrial sources
• Point of regulation: industrial facilities
• Allowances
– ~90pc allocated for free, based on energy efficiency benchmarks
– Updated annually to reflect emissions intensity
• Transition Risk
– Assistance offered to industries to help preserve
competitiveness
• Leakage Risk
– Adjustments to prevent companies from leaving the state
Assistance factors based on leakage risk
Leakage risk IndustryIndustry assistance factor
2012-2014 2015-2017 2018-2020
High Oil and gas extraction 100% 100% 100%
Inorganic chemical manufacturing 100% 100% 100%
Paper and paperboard manufacturing 100% 100% 100%
Glass manufacturing 100% 100% 100%
Cement manufacturing 100% 100% 100%
Lime manufacturing 100% 100% 100%
Iron and steel mill 100% 100% 100%
Medium Petroleum product manufacturing 100% 75% 50%
Food manufacturing 100% 75% 50%
Pesticide, agricultural chemical 100% 75% 50%
Breweries 100% 75% 50%
Sawmills 100% 75% 50%
Metal processing 100% 75% 50%
Gypsum product manufacturing 100% 75% 50%
Apparel manufacturing 100% 75% 50%
Polystyrene manufacturing 100% 75% 50%
Low Pharmaceutical, medicine manufacturing 100% 50% 30%
Aircraft manufacturing 100% 50% 30%
Transportation Sector
• Refineries covered in 2013
• Fuel suppliers/importers in 2015
• Refinery allowance allocations
– 90pc allocated for free
– Favors most efficient facilities
– First compliance period – two-pronged benchmark approach
• Only accounts for energy efficiency
– 2nd and 3rd compliance period – CO2 weighted approach
• Accounts for greenhouse gas efficiency
• Leakage and transition risk
Upstream emissions
Fuel producers’ 2010 upstream emissions in metric tonnes
Chevron 4,916,911
Aera Energy 3,275,302
Berry Petroleum Company 1,084,006
Plains 926,644
Oxy 831,817
Vintage Production 477,626
ExxonMobil 390,462
Seneca Resources 210,258
Macpherson Oil 206,199
BreitBurn Energy 44,584
TRC 37,925
Signal Hill 31,376
Intergy 30,330
Linn Operating 30,165
Sector total: 12.5mn mt
Source: California Air Resources Board
Chevron 23.7%
Conoco Phillips 17.5%
Shell 13.3%
BP13.2%
Valero 11.2%
Tesoro10.8%
ExxonMobil 8.7%
Alon 0.9%
Kern Oil 0.4%
Other refiners0.4%
Downstream emissions
Refiners downstream emissions, 2010
Total: 33.6mn mt CO2e Source: California Air Resources
Board
Early trade
• California Carbon Allowance Forward Trade Agreement
– Trended <$15/mt in early trade
• California Carbon Allowance ICE contracts
– Forwards launched 29 August
– Options contracts launched 19 September
• Natural players still largely absent
California Carbon Allowance pricing
15
17
19
21
23
25
27-Aug 18-Sep 10-Oct 1-Nov 23-Nov
$/m
t
Dec-12 Dec-13
Auctions
• 2012 – August 15 and November 14
• 2013 and beyond:
– February 12, May 12, August 12, November 12
• Purchase limits
– Applies to auctions in 2012-2014
• 15pc of allowances offered
• Investor-owned utilities exempt
– Advance auction allowances: 25pc
– Non-compliance entities: 4pc
Cost controls
Cost-containment measures
($/mt) Floor Ceiling Tier 1 Ceiling Tier 2 Ceiling Tier 3
2013 10.00 40.00 45.00 50.00
2014 10.76 43.04 48.42 53.80
2015 11.58 46.31 52.10 57.89
2016 12.46 49.83 56.06 62.29
2017 13.40 53.62 60.32 67.02
2018 14.42 57.69 64.90 72.12
2019 15.52 62.08 69.84 77.60
2020 16.70 66.80 75.14 83.49
Assuming Consumer Price Index for Urban Consumers is 2.6pc/yr (1990-2010 average).
Source: California Air Resources Board
Compliance
• Annual requirement
– 30pc of each years’ verified emissions
– Due on November 1 of following year
• Triennial true-up
– Balance of three-year compliance period emissions
• Excess emissions
– 4:1 penalty
– Due 5 days after next auction
– 3/4 of penalty allowances put in auction reserve
Offsets
• Four compliance protocols
– Ozone depleting substance destruction
– Livestock methane capture
– Forestry
– Urban forestry
• Early action credits
Splintered market
• ODS considered less risky
• Forestry sees offsets shaved off for buffer pool
• Livestock methane smaller projects
Offset price trends
2
4
6
8
10
12
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
$/m
t
California-compliant Non-California compliant
Offset supply v. demand
• Total allowed offsets in 2013-2014 is 25.8mn
– Climate Action Reserve projects it will issue 28.5mn by 2014
• Additional protocols under consideration
– Rice cultivation
– Pneumatic valve replacement
– Fertilizer management
• Risk of invalidation and buyer liability
• Buying direct from project developer
– Better positioned to re-verify
– Better positioned to convert to early action credits
Linkage
• Western Climate Initiative
– British Columbia, California, Manitoba, Ontario and Quebec
• Regulatory alignment
– Equal recognition of compliance products?
– Unified offset protocols/requirements
• Tracking system
• Regional auctions
California predominance
California59%
Ontario23%
Quebec10%
British Columbia8%
Other41%
WCI total emissions, 2008
Source: ARB, Environment
Canada
Potential paths for change
CARB/CPUC
Legislation Court Challenges
www.argusmedia.com
Michael Ball
Carrie Sisto
202.775.0240
London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing,
Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hamburg and Johannesburg