Tuesday, November 13, 2012

Happy California Cap-And-Trade Eve

Nice radio program on California's cap-and-trade allocation auction that starts taking bids tomorrow, and on Monday we'll find out the price per ton, with a minimum price set by regulation at $10/ton.  Second biggest cap-and-trade market in the world after Europe.  Hopefully we've learned from other's mistakes (and I think we have).

One critique deserving a response is whether including a minimum and maximum price on allocations somehow proves a failure of the cap system.  The idea is if a cap's appeal over a carbon tax is that it determines the total amount of emissions, then the floor and ceiling prove the lack of commitment to determine the right amount of emissions.

Three responses:

1. Doesn't matter anyway unless the price hits the floor or ceiling.

2. It's a little simplistic to say a tax focuses on specific price for carbon while a cap focuses on specific quantity of carbon emissions.  The floor and ceiling for a cap just lets society choose a tradeoff between price and quantity.  You could do something similar with a tax by letting the tax price change if total emissions fall through a floor or above a ceiling.

3. If greenhouse gases were as easy to eliminate as ozone-destroying chemicals then we'd have a similar schedule for phaseout.  It's not that easy, so we're doing things less quickly under either a carbon tax in Australia, or cap in Europe and in parts of the US.  Putting a floor is an indication that we overestimated the difficulty in achieving a reduction and therefore will require a larger reduction.  It's actually good news, that we can achieve reductions more quickly than anticipated.


Unknown said...

Australia's approach is actually an ETS, not a carbon tax, but because the price is fixed until 2015 it operates like a tax.

Tim Stephens

Brian said...

I understood that Australia would switch to an ETS/captrade system in 2015. In what sense is the current system an ETS? Is there a cap on allocations, are the allocations tradeable?

I've looked around a bit and didn't find a lot of details.

EliRabett said...

Can the state at some point buy up some of the allowances and shrink the supply?


"Can the state at some point buy up some of the allowances and shrink the supply?"

This is best done by biodiesel magnates using the obscene profits pouring from their carrot top stills.

Gaz said...

Some details here.


The site is mostly advertising blurb but there is some actual information if you look hard enough.

Brian said...

I think Eli's question may have been about California. I'm pretty sure the answer is that non-polluters can buy allowances and simply not use them (no point in the state doing this; it should just issue fewer allowances). The allowances are auctioned annually though, so you can't get a permanent reduction in annual emissions this way unless you buy them every year. There are some restrictions to prevent entities from cornering the market.

More info:

"California covered entities, opt-in covered entities, and voluntarily associated entities
are eligible to participate in the November 2012 GHG allowance auction. Approved
offset registries, verification bodies, and offset verifiers are not eligible to participate in
auctions as they are not allowed to hold compliance instruments under the Cap-andTrade Regulation (Regulation). Prior to participating in an auction, the Primary Account
Representative (PAR) and Alternate Account Representative (AAR) that will be
authorized to bid on behalf of entities eligible to participate in the auction must be
approved users in the Compliance Instrument Tracking System Service (CITSS) and
the entity must have an entity account in the CITSS. Voluntary associated entities that
are participating in the auction as individuals will be required to submit additional
documentation to the Financial Services Administrator as contained in Appendix A of
the Regulation."


Robin Johnson's Economics Web Page said...

"One critique deserving a response is whether including a minimum and maximum price on allocations somehow proves a failure of the cap system."

I agree that "It depends". Using the NZ Emissions Trading Scheme as my example I would say that it's good risk management to have a price floor in place at the start of trading.

How open to international units is the California cap-and-trade scheme? What's the degree of 'linkage'? The NZETS is highly open.

The NZETS accepts virtually all international Kyoto units, except nuclear related units and units from CDM HFC & N20 destruction projects
The NZETS has a $NZ25 price cap (to protect emitters) but not a price floor. The NZ price collapsed this year following the CDM CER price drop.

In the last quarter, the NZ carbon price per tonne CO2-e was less than a coffee. For the latest prices and a trend chart, see Commtrade.co.nz. Consequently the NZETS 'on a stretcher' and foresters are saying $3 a tonne carbon price is an invitation to deforest, not to afforest.

Learning point: the NZETS should have had a price floor.

The Government's response is to amend the NZETS so that agriculture is permanently excluded and to dick around some more about some of the more obviously dodgy international units.

Brian said...

Robin - if by international units you mean offsets, then the answer is not very open. California is setting up its own registry for offsets. Cal also limits use of international offsets and (I think) out-of-state offsets. I presume an entity getting CDM credit can cross-register in California.

I assume there's some mechanism to prevent double dipping between offset markets in different countries, but I don't know for sure.

David B. Benson said...

Brian --- The entire offset thingy looks dodgy to me. I wager there are ways to game the system.

Robin Johnson's Economics Web Page said...

Brian, if you have kept 'offsets' out of the AB32 ETS, then 9/10 for ETS design in my book. Well done, Califiornia!

Brian said...

Robin - California does allow limited use of offsets. IIRC, up to 20% of carbon allowances can be done through offsets certified through a specified registry, which as of last spring had only allowed three types of offsets. There were some other restrictions as well, particularly on international offsets.

A Stanford academic, Michael Wara, has a writeup somewhere. I can dig it up if you'd like it.