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California’s Carbon Market: Choices and Challenges

California’s Carbon Market: Choices and Challenges. James Bushnell University of California at Davis. Outline. California’s carbon market one year in The economic theory of cap-and-trade And why it (mostly) doesn’t fit carbon markets Things to look for going forward

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California’s Carbon Market: Choices and Challenges

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  1. California’s Carbon Market: Choices and Challenges James Bushnell University of California at Davis

  2. Outline • California’s carbon market one year in • The economic theory of cap-and-trade • And why it (mostly) doesn’t fit carbon markets • Things to look for going forward • Key Takeaway: Price Collars are Really Important in Carbon Markets!

  3. The Carbon Market: One year in

  4. The Carbon Market: One year in

  5. The Carbon Market: One year in

  6. California Allowance Prices

  7. Theory of Cap and Trade • Market based environmental regulation • Regulator sets how much pollution is allowed • The “market” decides who reduces pollution and how they do it. • Preferred to taxes in settings where we are more worried about hitting a specific emissions target than the costs of hitting that target.

  8. Regulator decides how much?

  9. Regulator decides how much?

  10. Market decides who and how?

  11. Climate and cap-and trade theory • Should not take quantity targets too literally • Local action to reduce global pollutant • All targets to date well short of what is needed • Much talk of adding a consistent cost of GHG emissions to business planning and consumer activity • But caps are a bad way to do that • Key question: what is the best way to build forward momentum for reducing global GHG? • Key Takeaway: Price Collars are Really Important in Carbon Markets!

  12. Supply of Allowances Allowance Price $50 Price Containment Reserve $40 125 mmTons 125mmTons $10.5 Offsets Cap (less Reserve) 0 2380 mmTons

  13. Demand for Allowances Allowance Price $50 $40 $10.5 BAU emissions 0 ~2700 mmTons

  14. Demand for Allowances Allowance Price $50 $40 Complementary Policies $10.5 ~ 200 - 400 mmTons BAU emissions 0 ~2700 mmTons

  15. Demand for Allowances Allowance Price $50 $40 Electricity, Gasoline, and Natural Gas Demand Response ~ 40-60 mmTons Complementary Policies $10.5 ~200 – 400 mmTons BAU emissions 0 ~2700 mmTons

  16. Supply and Demand Allowance Price $50 Price Containment Reserve $40 125 mmTons $20 $10.5 Offsets 125 mmTons Cap (less Reserve) 0 GHG Emissions 2380 mmTons

  17. Supply and Demand Allowance Price $50 Price Containment Reserve $40 125 mmTons $20 $10.5 Offsets 125 mmTons Cap (less Reserve) 0 GHG Emissions 2380 mmTons

  18. Possible Distributions of Allowance Price Probability Price = X 0 $10.50 $50 $40 Allowance Price

  19. 2006-07: EU Carbon price crashes

  20. California Allowance Prices

  21. Things to Look for Going Forward • End of Phase I (2013 – 2014) • Reporting of electricity imports • What happens if there is a positive shock to emissions before 2020? • The importance of transportation • Policy supporting the price-containment reserve • What will happen post 2020? • Banking of allowances supports minimum prices • Relationship with rest of US?

  22. Summary • Price Collars are Really Important in Carbon Markets! • A good price-collar makes up for a lot of flaws in any cap and trade market • Stable non-trivial carbon prices best way to steer investment and consumption on to a low carbon trajectory

  23. Thank You! Special Thanks and Apologies to the websites of Environmental Defense Fund SNL Financial Carbon Policy Initiative

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