Written by Tiffany Roberts
Carbon market spectators and participants alike waited with bated breath for today’s release of CARB’s quarterly cap-and-trade auction results. Many have speculated for some time now about the potential impact that COVID-19 would have on the market. So, today’s announcement was not a huge shock.
Knowing that macroeconomic fluctuations drive the cap-and-trade market, it is unsurprising that the global pandemic has impacted emissions and that in turn spilled over to the May auction, resulting in a significant drop in auction participation and revenue.
But what is surprising – and disconcerting – is that we are already hearing from some corners that it might be time to rethink the program. Some have even called this a failed auction.
But should this really be categorized as a failed auction? Do we really want to say that an auction is a failure if 100% of available allowances aren’t sold? I would maintain, to the contrary, this is not a failed market at all. And in fact, today’s results demonstrate a market design that is working.
Consider these three points.
Cap-and-trade is an environmental program, first and foremost
As we’ve heard time and again, cap-and-trade is not intended to be a revenue generator. Its primary function is to place a price on carbon and create the right incentive structure to drive greenhouse gas emissions down over time. At its core, it is an environmental program. We should not forget that, lest we get caught up in the idea that the state is only successful if it is bringing in buckets of cash.
We should continue to celebrate the fact that California was ahead of schedule in delivering on its commitment to reduce greenhouse gas emissions to 1990 levels by 2020. And cap-and-trade has served as the backstop to all other state programs to ensure that we were able to meet that goal.
Cap-and-trade has safeguards in place and those safeguards are working
California regulators and policymakers learned several lessons from the experience of the EU Emissions Trading Scheme (ETS). Of those lessons, one the most important was the role a cap-and-trade price floor could play in reducing volatility. Because the EU-ETS lacked a floor, we saw a fall in that market, the results of which persisted for years. Alternatively, California policymakers included a floor price as one of the original design features in the state’s program. That feature has helped create a safeguard and increased the program’s resiliency. We are in fact seeing that design feature work now, preventing prices from dropping below a designated level.
Cap-and-trade’s AB398 provisions are still being implemented – give them a chance to work
In 2017, a large group of stakeholders came together to work collaboratively to find a way to extend the state’s premier climate program. Many of those additional design features are scheduled to go into effect in 2021. It would be premature to make changes to the program before the state has an opportunity to evaluate the effect of those features. Now is the time to reinforce confidence in the market, not undermine it by changing the rules of engagement mid-stream.
Instead of characterizing the results we see today as a failure, let’s acknowledge that this is how the program was designed to respond…and in a certain sense, maybe we should be proud of the fact that, during one of the biggest economic shocks of our generation, the program is proving to be durable in the face of such adversity.
Tiffany Roberts is director of legislative and regulatory policy at the Western States Petroleum Association. You can follow her on Twitter @tiffanykroberts.