CARB staff’s third informal discussion on potential amendments to cap-and-trade regulation highlighted touch on some vital features of the program. Namely allowance allocation or more specifically assistance factors, cost containment, setting post-2020 cap, DEBs, price ceiling etc. The comments from participants was used as a stepping stool for the staff presentation. Throughout the discussion staff were encouraging stakeholder feedback on different methodologies and/or processes that might have been overlooked.

CARB made it clear that they want to stick to the core features of the cap-and-trade program that have been working effectively. Arguably the defining factor of cap and trade has been that it is a market mechanism and should be continued to be treated as such, even as amendments will be made. A reoccurring aspect of these discussions continue to be about striking a balance between continuing economic growth and reducing emissions. Environmental groups spoke up about the importance of California’s ability to be more ambitious at this time, however staff pointed out that further stringency in the program without proper considerations can hinder economic growth and increase the risk of leakage.

A discussion about considering lowering annual emissions stemmed from California having higher ambitions. It was made clear that the state of California is legally bound to decrease overall emissions so program even post-2020 is being designed so that focus remains on reduction of aggregate emissions as opposed to annual emissions. If annual emissions are going to be taken into consideration, as suggested by some attending the workshop then assumptions and calculations for annual reductions could be different even if current cap is mandated to be lowered annually. Part of the core features of cap and trade is that it is market-driven. Hence, even with changing regulations ARB wants to keep it competitive as it has been in the past since prices are market driven.

Unused allowances: Unused allowances beyond post-2020 was a big topic of conversation during the workshop. From the comments it is evident that unused allowances are somewhat of a divisive topic. As mentioned in the supporting documents written by ARB staff, for some unused allowances indicate that cap-and-trade and supporting programs like LCFS and RPS are working effectively to reduce entities’ need for additional allowances i.e. lowered emissions. For other unused allowances in the market represents allocation over the caps which could allow entities to comply whilst not reducing emissions.

The availability of these allowances means it undermines the stringency of the program which could work against achieving necessary GHG reductions by 2030. Current modelling shows that 52,400,000 allowances should be in the APCR (available to be bought at a higher price) to allow cost containment. The formula for calculating this number remains consistent with pre-2020 years and within the cap. So even if entities do buy allowances from APCR allowances will be limited in accordance with the cap so that there is lowered GHG emissions. ARB is also considering removal of around 2 million additional allowances from circulation into post-2020 reserve tiers from 2026 to 2030 since offset limit increases from 4% to 6% for the last 5 years of the program.

After taking into account certain factors the number that ARB is using for its calculations is 150 million (ref to supporting documents for the workshop) unused allowances post-2020 which ARB staff advises should not be removed from the APCR in case of deficiency in supply in the future.

Allowance Allocation- Cap Adjustment Factor: Most stakeholders pointed out that 100% assistance factor should be in place for Compliance Period 3 which will help entities adjust into post-2020 period with lower caps. They also citied high compliance costs, leakage risks and “disruptive to affected covered entities”. The CAF is already set to decline much rapidly in the post-2020 period i.e. 3.6% per year which is over 2% faster than current CAF.  Staff said that the rationale for providing 100% assistance factor in CP3 is that there could be potential leakage in CP3 which does not necessarily consist of entire industries moving out-of-state however they could be incentivised due to competition from companies that do not have compliance obligations.

There was mention of Direct Environmental Benefits (DEBs) however not much conversation about specifics around it. CARB is open to suggestions on a proper definition of DEBs. The staff is looking for active stakeholder participation on this.

Conclusion: CARB staff stressed on the fact that there are a number of uncertainties that could alter the outcome in the coming years which should be kept in mind by stakeholders. Exclusion of these factors in methodologies does not imply oversight however as the process unfolds they expect their methodology to improve along with stakeholder feedback. However, regulations that have worked in favour of cap-and-trade in the past should be kept intact order to ascertain sure fire results.

Analyst contact: Abhilasha Fullonton (abhilasha.fullonton@californiacarbon.info)