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News Update
- Cap-and-trade will play a smaller role in California's proposed Scoping Plan. Due to more complementary policies, California's WCI-linked cap-and-trade system will play a slightly smaller role in meeting the state's 2030 climate target, with regulator ARB either deferring any reform measures to the legislature or implementing them after the final Scoping Plan is completed, according to the proposed plan. ARB identified a path for the state to meet its GHG reduction target of 40% below 1990 levels by 2030 and achieve CO2 neutrality by 2045 in the draft 2022 Scoping Plan, which was released as part of California's five-year statutorily required climate strategy update. Non-cap-and-trade measures are expected to reduce California emissions to 304 Mt in 2030, according to the draft 2022 Scoping Plan, implying a 16 Mt – or 27% – reduction in cap-and-trade contributions compared to the 2017 plan. Nonetheless, the ARB stated that delays in the successful implementation of non-cap-and-trade programs and policies, additional legislative or regulatory policies for California's economic sectors, and the possibility of a delayed economic recovery from the pandemic all pose risks in achieving non-carbon market reductions. As a result, the role of the cap-and-trade program in meeting the state's GHG emission reduction targets would be impacted. According to the 2017 Scoping Plan, cap-and-trade would reduce emissions by a total of 236 Mt from 2021 to 2030. The draft Scoping Plan deferred any future changes to the cap-and-trade program until after the document is finalized by year's end, as previously stated by ARB officials.
- Participants in the GHG initiative advocate for increased coordination. Participants in the carbon market consider improved trading activity between diverse cap-and-trade schemes as well as increased convergence between compliance and voluntary programs as valuable. Market participants warned on April 7 at Climate Action Reserve's North American Carbon World (NACW) conference in Anaheim, California, that without further connections of some kind, it will be difficult for markets to convey the optimum pricing signals for carbon reductions. Increased convergence in the voluntary and compliance markets is on the horizon, which will be beneficial for maintaining trust in the voluntary carbon market, delegates stated. However, one challenge of increased convergence is that there are still price premiums for certain project types and sometimes vintages within the voluntary market, with carbon removal projects such as direct air capture commanding a high premium due to scarcity of supply. Unlike the benchmark California Carbon Allowance contract in the WCI, this spreads liquidity across numerous contract types.
- California's climate policy is facing challenges. According to Rajinder Sahota, deputy executive officer of the California Air Resources Board (CARB), the state's efforts to swiftly decarbonize are delayed by long permitting periods, skepticism from some community organizations about the state's market-based initiatives, and local project resistance. California needs to create utility-scale solar and offshore wind, as well as transmission, to get power to where it is needed. Some neighborhood organizations allege that the cap-and-trade scheme is increasing air quality inequities, although this is a myth that has cast a "shade over the program." Nonetheless, California's "long, unshakable commitment" to addressing climate change has been a powerful signal attracting investment and allowing the state to be a sector leader. California is in the process of revising its climate change scoping plan, which outlines the strategies the state will employ to fulfill its emissions targets, such as LCFS and cap-and-trade. CARB staff intends to provide a draft plan in May, which will be submitted to the board in June. Legislative guidance will be "fed back into the scoping plan" during the summer, and by September or October, agency staff will have a final plan ready for a vote by the CARB board. Participants in the LCFS and cap-and-trade markets are keeping a close eye on the scoping plan because it will influence future adjustments to both programs, including increasingly strict emissions limits.
- CARB pressed on carbon market surplus. California's cap-and-trade program has a 300 million allowance excess, which could diminish the market signals the state uses to encourage carbon reduction. California's Independent Emissions Market Advisory Committee (IEMAC) told the Joint Committee on Climate Change Policies on April 21 that an excess of carbon allowances and declining incentives threaten to derail the state's emissions-reduction targets. California will decide on a draft scoping plan next month that will guide the state's multitude of carbon-reduction incentives and regulations for the next five years. Cap-and-trade and the Low Carbon Fuel Standard (LCFS) are two of the many measures employed by the state to achieve a 40% reduction in greenhouse gas (GHG) emissions by 2030. CARB has been concentrating on improving the scoping process in order to guide choices on each market or program. As the state seeks to update its climate policy and targets this year, legislators questioned CARB chair Liane Randolph about the agency's assumptions on the efficacy of carbon capture technologies. CARB, according to environmental justice organizations and other critics, has taken an overly optimistic stance on their utilization, anticipating a 90pc efficacy rate.
- California bills aim to reduce allowance oversupply. California lawmakers have introduced two bills to overhaul the state's carbon cap-and-trade scheme, with the goal of increasing transparency and addressing an oversupply of allowances. The two bills propose only minor changes to the state's carbon market, but supporters argue that reform is necessary to compel regulated firms to reduce emissions more swiftly.
- SB 1391 does not require any immediate modifications to California's program, but it does force the state to establish more strict standards if it wants to participate in any new carbon markets. To facilitate new linkages, the California Air Resources Board (CARB) would have to conduct a review of the program at least once every three years, and any offset utilized toward compliance would automatically lower the program's overall supply of allowances.
- AB 2793, on the other hand, would force CARB to evaluate the program's success every three years, regardless of whether the state pursues future links. Regulators would be required to keep track of the amount of unused allowances and other compliance tools and report their results on an annual basis.
- California on April 12 issues more forestry offset credits. The California Air Resources Board (CARB) awarded more than 1.27 million California Carbon Offsets (CCOs) to forestry projects.
- The majority of the credits went to two avoided conversion projects in Florida and Georgia that will preserve forestland covering more than 146,000 acres. CARB awarded the Holland M Ware Charitable Foundation a total of 1.16 million credits for the two projects.
- A total of 111,970 CCOs were distributed to two additional improved forest management (IFM) projects. The Mescalero Apache Tribe's project in New Mexico received 60,059 CCOs, while the other IFM project in Virginia received the remaining 51,911 CCOs.
- CARB also allocated 36,444 CCOs to two mine methane capture projects in Utah and Alaska, as well as 6,351 CCOs to the Remley Family Farms anaerobic digester livestock operation in Pennsylvania.
CARB issued almost 1.3 million CCOs, none of which qualified as providing direct environmental benefits (DEBs) to California.
- California on 26 April 26 issues offsets to forestry projects. The California Air Resources Board (CARB) granted over 240,000 carbon offsets, the majority of which went to two forestry projects.
- North Coast Resource Management's (NCRM) Brushy Mountain improved forest management project on more than 16,000 acres in Mendocino County, California, received over 107,400 CCOs from CARB.
- The NCRM-led Mailliard Ranch improved forest management project, also in Mendocino County, received over 74,500 CCOs.
- Additionally, CARB gave Hudson Technologies approximately 58,200 CCOs for collecting ozone-depleting compounds from sources in California and six other states and burning them at a facility in Bowling Green, Ohio.
Offsets Update
- ARB has issued an overall 1,554,759 carbon offsets in April 2022
- 1,314,662 issued on April 12th
- 240,097 issued on April 26th
- 240,097 of the CCOs issued are listed as DEBs
- On April 12th, ARB cut down the invalidation period from eight years to three years on 15,111 credits, the total being 134.37 mln
- On April 26th, ARB cut down the invalidation period from eight years to three years on 546,143 credits, the total being 134.92 mln
- 61 mln offsets have been issued since inception by ARB and Quebec
- 1,052,400 Quebec offsets have been issued in total; 0 credits issued in April 2022
California:
Issuance
|
ODS
|
Livestock
|
U.S. Forest
|
Urban Forest
|
MMC
|
Rice Cultivation
|
Total
|
March '22
|
24,736,379
|
8,420,944
|
193,772,049
|
0
|
8,994,363
|
0
|
235,923,735
|
April '22
|
24,794,570
|
8,427,295
|
195,225,822
|
0
|
9,030,807
|
0
|
237,478,494
|
Delta
|
150,443
|
45,014
|
2,920,319
|
0
|
0
|
0
|
3,115,776
|
Quebec:
Issuance
|
ODS
|
Livestock
|
U.S. Forest
|
Urban Forest
|
MMC
|
Rice Cultivation
|
Total
|
March '22
|
578,785
|
0
|
0
|
473,615
|
0
|
0
|
1,052,400
|
April '22
|
578,785
|
0
|
0
|
473,615
|
0
|
0
|
1,052,400
|
Delta
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Offsets Pricing
Offset Pricing as of May 17th, 2022:
- California Carbon Offset (CCO3) - (3 years of Buyer Liability) $16.00
- Golden California Carbon Offset (CCOs) – Spot Delivery $17.00
- California Carbon Offset (CCO3 - DEB) - (3 years of Buyer Liability) $17.90
- Golden California Carbon Offset (CCOs- DEB) – Spot Delivery $18.70
ARB Schedule
- 05/18/2022 WCI quarterly allowance auction
- 05/26/2022 WCI quarterly allowance auction results
- 08/17/2022 WCI quarterly allowance auction
California Carbon Allowances (CCA)
- Allowance pricing as of April 19th, 2022: $31.13– Vintage 2022, April 2022 Delivery
- The average daily price in March 2022: $27.46 – Vintage 2022
Market Update
- Average daily price in April 2022 was $31.57 which was a 14.8% increase compared to the average price of $27.46 in March 2022.
- KraneShares Carbon ETFs (both ETFs) decreased carbon allowance holdings to 15.64 million as of May 17th, after having increased holdings to over 18.5 million California allowances as of February 14th, 2022, saw a pullback to 16.85 million California allowances as of March 8th, and then 16.6 million on April 19th.
- The 2022 floor price is $19.70 and April 2022 inflation was reported at 8.3%. If that remained through October 2022, the 2023 floor price would be $22.32.
- The low for 2022 may be in after trading $23.80 in March especially with a projected floor price above $22.00 for 2023.
- Offsets still provide significant costs savings for compliance entities versus the price of allowances (41%-48% discount depending on the carbon offset).
Figure 1. Open Interest on the Intercontinental Exchanges (ICE) - Vintages 2017-2023
Figure 2. CCA Daily Transactions (Spot Contract - January 2018 to Present)
2021 Average Daily Price: $22.99 per ton |
2022 Average Daily Price: $29.36 per ton |
2021 Highest Daily Price: $35.14 per ton (November 15th, 2021) |
2022 Highest Daily Price: $33.48 per ton (January 1st, 2022) |
Figure 3. CCA Daily Transactions (Spot Contract - January 2020 to Present)
Questions? Contact our team for more information: environmental@aegis-hedging.com
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