On Monday September 24, AB 32 stakeholders got their first look at the latest team hired by CARB to work through the increasingly vexing issues surrounding the upcoming November auction. Pursuant to an agreement with the University of California Energy Institute, CARB has contracted with the Emissions Market Assessment Committee (EMAC) to provide expert analysis and advice on the cap-and-trade market design, operation and monitoring.
However, EMAC appears to be an off-shoot of the Market Simulation Group (MSG) as both entities are comprised of the same members: Severin Borenstein, University of California, Berkeley; James Bushnell, University of California, Davis; Frank Wolak, Stanford University; and Elizabeth Bailey, University of California, Berkeley.
According to CARB, the EMAC will be considering and reviewing market issues and stakeholder concerns and prioritizing them for economic analysis. The EMAC is free to respond to the issues in a variety of methods some of which include presentations at public EMAC meetings, written analyses or through consultations with and advice for CARB staff. The form of communication will depend on whether the issues can be addressed publicly. The EMAC will also conduct closed meetings with CARB staff on market issues that involve confidential market information.
At its first public meeting the EMAC team covered four aspects of the cap-and-trade market: CARB’s resource shuffling provisions, Quebec linkage, public information availability and the impacts of all of these on the operation of the allowance price containment reserve. The presentations and background materials can be found HERE.
The major points merging from the meeting was that many uncertainties remain unresolved regarding the upcoming auction and the cap-and-trade in general and that there remained a very real chance the market could fail.
In brief, the salient points as to the specific topics were:
Resource Shuffling: Legal Enforcement vs. Market Design Changes
CARB’s definition of resource shuffling is causing fits for the utilities and importers of energy. The current definition states: "resource shuffling" means any plan, scheme or artifice to receive credit based on emissions reductions that have not occurred, involving the delivery of electricity to the California grid.
EMAC shied away from CARB’s definition as legally unenforceable due to vagueness and the near impossibility of showing intent to commit fraud. As for the Market design solution, EMAC suggested that CARB provide more free allowances to generators to prevent resource shuffling. However, it was noted that this will again raise the costs while reducing the amount of allowances available to regulated entities.
The investor-owned utilities (IOU) proposed a joint resource shuffling definition that would hold parties accountable for "substitutions of resources" rather than "emissions reductions" and identify energy market behaviors that would not be considered resource shuffling.
The IOU proposal is HERE.
Quebec Linkage: Little or no benefit to California to link with Quebec
EMAC presented a number of reasons cited for not linking with Quebec. These included Quebec’s size and economic output; Quebec’s GHG-emissions intensity as compared to California’s; Quebec’s population at 7.9 million and GDP at $319,348 million (CAD) compared to California’s population of 37.7 million and its GDP is $1,936,400 million (USD); In addition, Quebec’s electricity sector is primarily hydroelectric, whereas California’s is dependent on natural gas and because Quebec and California are not part of same electricity interconnection.
EMAC conclusion is that CARB should delay linkage until both California and Quebec markets are well-functioning which is unlikely to occur until 2015 at the earliest.
Allowance Price Containment Reserve
CARB’s allowance price containment reserve was established to provide a safety valve to the allowance price and help to mitigate undue volatility in allowance prices. This discussion centered on what would happen should California’s economy recover too quickly. If production were to increase prior to 2020, the demand for allowances could cause allowance prices to skyrocket. Regulated entities would then turn to the reserve seeking allowances capped at $45 -$50. However, what would be the result if all reserve quantities at these prices were sold and the reserves were exhausted - what would happen? EMAC is soliciting data and modeling examples from stakeholders in order to determine a solution.
In the end, EMAC conclusions implied that a multitude of uncertainties remain concerning CARB’s regulation and that moving forward with the cap-and-trade carried risks for California industries and any hoped-for economic recovery.
California League Of Food Producers