emission allowances – GHG Accounting

Québec’s First Cap & Trade Permit Auction Results

In the first auction of permits under Québec’s cap-and-trade scheme on December 3, 2013, bidders purchased only about one-third of the emission allowances offered – or 1.03 million of the 2.97 million 2013 permits. As a result of the low demand, the permits cleared at the lowest possible price of $10.75 per metric tonne of carbon dioxide equivalent.

Québec said it sold a combined CAD $29 million in 2013 and 2016 allowances in the auction. The province plans to sell the remaining 2013 carbon allowances in future auctions, which will be held every quarter starting March 4. Regulated entities will have until November 1, 2015 to acquire carbon allowances covering emissions generated in 2013 and 2014.

Yves-François Blanchet, Québec’s Minister of Sustainable Development, Environment, Wildlife and Parks said that the province is very satisfied with the results of the first auction and is confident that the remaining units will be sold at the upcoming auctions. Bloomberg New Energy Finance market analyst William Nelson observed that it was a “surprisingly under-subscribed auction”, but went on to say that the province’s failure to sell all the allowances in the first auction was a “one-time freak result”. Nelson anticipates that future auctions will fare better as the entities that did not participate in the auction this week will eventually show up as they still need to cover their emissions for the next two years.

Quebec’s program will be integrated with the larger California cap-and-trade market in 2014, when entities from both jurisdictions will be able to buy and sell emission allowances and offsets in either jurisdiction. At California’s last auction on November 19, 2013, the state sold 16.6 million tons of carbon allowances at a price of $11.48 each, which was in line with market expectations.

The results of the Québec auction are available online (in French only)

The results of California’s November 2013 auction are also available from the state’s Air Resources Board.

Release of Latest IPPC Report Spurs Calls for Action from Business Leaders

On September 25, 2013 the Intergovernmental Panel on Climate Change (IPCC) released Climate Change 2013: the Physical Science Basis, the first part of its Fifth Assessment Report (AR5). Six years in the making, the 2,200 page report was developed by 209 lead authors, citing more than 9,000 scientific publications in their analysis of key physical and scientific aspects of the climate system and climate change.

The report confirms that human influence is the dominant cause of observed warming. Scientists now state with more certainty than ever before, that it is extremely likely (95% probability) that human activities, particularly combustion of fossil fuels and changes in land use, are responsible for the 0.85ºC increase in average global temperatures that has occurred since 1880.

There has been a reduction in the rate of atmospheric temperature increases over the past fifteen years which the IPCC attributes to the absorption by the oceans of a large amount of heat, and sequestering a third of the greenhouse gas emissions. This is by no means good news, since warmer waters expands leading to rising sea levels, sea temperatures also significantly influence climate patterns and an increasing concentration of greenhouse gases in ocean waters contributes to acidification with negative impact on aquatic ecosystems. The report concludes that “human influence has been detected in changes in the global water cycle, in reductions in snow and ice, in global mean sea level rise, and in changes in some climate extremes.”

The report lays out four different potential scenarios for global temperature rise over the course of the century, ranging from 0.3 ºC to 4.8ºC. In the immediate decades, all four scenarios follow a similar trajectory, showing a low sensitivity to curbing emissions in the short-term. But if current trends continue, the effects of cumulative emissions will be difficult to mitigate due to the long half-life of greenhouse gases and their continued impact on the climate long after emissions subside.

The AR5 is the first IPCC report to define a “carbon budget” – an estimate of the maximum amount of human caused emissions that can be released in the atmosphere before we experience warming greater than 2ºC – the indicative threshold beyond which extensive global environmental and socio-economic damage is expected. That carbon budget is 1,000 trillion tonnes of carbon dioxide equivalent (CO2e), of which approximately half has already been emitted. Based on carbon-intensive trajectories, this means that the world has just 30 years until it has used up its carbon budget. If we exceed this budget, the chance of staying within 2ºC of warming looks far less promising.

What does this mean for business? In short, climate change brings with it greater risks and investment challenges:

• More frequent extreme weather events: Higher temperatures and more extreme weather are among the most apparent business risks. At the World Economic Forum in 2013, financial experts named climate change as one of the top three business risks. From raging wildfires to severe flooding, extreme weather events can imperil operations throughout a company’s supply chain. Rising sea levels will also threaten shorelines. According to the IPCC, sea levels have likely risen nearly twice as fast as previously reported. More than 1 billion people worldwide, along with many financial centers, are located in low-lying coastal communities. According to the OECD, average flood losses in major cities around the world could exceed $52 billion per year by 2050, and possibly go as high as $1 trillion without additional protection. At the other end of the spectrum, some regions will be faced with greater water scarcity rather than flooding. In the Carbon Disclosure Project’s 2012 Global Water Report, 53% of respondent companies reported that they have experienced water-related detrimental impacts in the past 5 years (up from 38% in 2011), with costs as high as $200 million for some companies.

• Risks to energy infrastructure: Extreme weather also poses a threat to energy and electricity infrastructure by potentially disrupting production, delivery, and storage of energy. Many power sources depend on water and decreased water availability due to changing precipitation trends may threaten operations.

• Investment risks: Climate-related economic disruption also compounds risks to global investments. A 2011 Mercer study warned that climate change could increase investment-portfolio risk by 10 percent over the next two decades. The IPCC’s carbon budget may have implications for fossil fuel companies, which are traditionally among the higher grossing investments. Since their value is based on proven reserves, there is a risk of devaluation if a significant portion of the reserves are left untapped in order to keep within the carbon budget.

• Insurance risks: Extreme weather events are already having an impact on the insurance industry. As damage from extreme weather events increases, insurers are faced with either hiking rates or refusing to provide coverage in disaster-prone areas. Ultimately, increased costs will be passed onto businesses and consumers.

While climate change presents clear risks to business, smart responses can deliver economic benefits as well. In a 2010 report by the UN Global Compact, more than 86 percent of businesses named responding to climate change as an opportunity. This is reflected in the actions of many multinational corporations, which are already taking steps to reduce risks and lower their greenhouse gas emissions. Whether it is driving emission reductions throughout the supply chain, investing in renewable energy or phasing out the use of carbon intensive materials, companies are choosing to act.

Industry comments in response to the IPCC report highlight the urgent need for action for more, see ‘Experts React’. Nick Robins, head of the Climate Partnership at HSBC, commented that: “The IPCC report provides firmer foundations for policy action. For the world’s capital markets, climate change is an issue of strategic risk management … Our research shows that India, China, Indonesia, South Africa and Brazil are the G-20 nations that are most vulnerable to climate risks. We expect the succession of IPCC reports into 2014 to provide a renewed impetus to policy and business action through to the finalization of negotiations in December 2015.” Head of Swiss Re’s sustainability program in the Americas, Mark Way, also said: “When a body like the IPCC concludes that with 95% certainty mankind is causing climate change we would be foolish not to listen. And yet we are still not listening closely enough. The transition to a low carbon economy and a more climate-resilient society cannot be thought of as options, they are necessities.” Mindy Lubber, president of Ceres (a US-based organisation which presses for greater sustainability and environmental awareness in the business sector) summed it up nicely: “The IPCC report’s conclusion is unequivocal – climate change is happening and it’s disrupting all aspects of the global economy, including supply chains, commodity markets and the entire insurance industry. Business momentum is growing to innovate new strategies and products to manage climate risks and opportunities. But scaling these efforts to levels that will slow warming trends will require stronger carbon-reducing policies globally.”

The IPCC will release three more parts to the AR5 report in 2014: Impacts, Adaptation and Vulnerability; Mitigation of Climate Change; and a Synthesis Report. For more information on the current report, see IPCC Fifth Assessment Report: Climate Change 2013: The Physical Science Basis.

Update on China: China Steps into Leadership Role as it takes Action on Climate Change

In his first comments as China’s prime minister, Li Keqiang recently laid out a vision of a more equitable society in which environmental protection trumps unbridled growth and government officials put the people’s welfare before their own financial interests. While the Prime Minister was short on specifics, his comments represent an encouraging acknowledgment of some of the pressing issues facing China.

Traditionally, China has been used as a carbon scapegoat and excuse for inaction by countries such as Canada and the U.S., whose per capita emissions are much higher. However the tables are turning with China beginning to take a leadership role in addressing climate change. China’s emergence as a climate leader means that Canada and other countries can no longer point their fingers at China as an excuse for not taking action to reduce their own greenhouse gas emissions.

China to roll out Cap & Trade in 2013

As the world’s largest emitter of carbon dioxide, China is preparing to gradually roll out cap-and-trade pilot programs in seven major cities and provinces starting in 2013. This initiative is part of a larger goal to reduce carbon intensity – or the amount of carbon dioxide emitted per unit of economic output – by 40% to 45% below 2005 levels by 2020.

In November 2011, the Chinese government decided to implement cap-and-trade pilots in two provinces and five cities (including Shanghai, Beijing and Shenzhen) beginning in 2013 with the final goal of implementing a nationwide exchange program by 2016. In less than two years, officials have designed and started to implement seven trading trials that cover around one-third of China’s gross domestic product and one-fifth of its energy use. If successful, the schemes could demonstrate that an emissions trading system will be an effective way for China to manage its greenhouse gas emissions. In addition, China’s activities may spur policy makers in other countries such as the US to act.

Bloomberg New Energy Finance previously estimated that the regional pilots would cumulatively cover 800 million to 1 billion tonnes of emissions in China by 2015, meaning that the market would become the world’s second largest after the European Union. It has been reported that at the beginning, regional and city-wide markets will remain separate with unique rules and criteria. For example, some of the markets will cover factories and industrial operations exclusively, while others will focus on power generation or non-industrial sectors.

The first trades took place in September 2012 in Guangdong province, when four cement-manufacturing companies invested several million dollars to acquire carbon pollution permits (allowances). The Guangdong scheme is expected to cover more than 800 companies that each emit more than 20,000 tonnes of carbon dioxide a year across nine industries, including the energy-intensive steel and power sectors. These firms account for more than 40% of the power used in the province. The Guangdong carbon market alone will regulate some 277 million tonnes of CO2 emissions by 2015.

China plans to open six further regional emissions-trading schemes in 2013, in the province of Hubei and in the municipalities of Beijing, Tianjin, Shanghai, Chongqing and Shenzhen. It plans to expand and link them until they form a nationwide scheme by the end of the decade. A nationwide scheme could then link to international markets.

Until now, China’s experience with carbon trading has been limited to the Clean Development Mechanism under the Kyoto Protocol. While China’s political system could let a carbon market grow faster than anywhere else because changes can be implemented quickly, the carbon market faces challenges in China. In particular, China needs to develop and enforce proper legislation and regulations to measure, report and verify carbon emissions from industrial sites. It also needs to build an effective framework to oversee the reporting and trading of carbon credits.

At this stage, the most urgent issue that needs to be addressed is how China collects and analyzes data on carbon emissions. The credibility of China’s statistics on energy use and carbon emissions has been questioned partly because of the large discrepancies between numbers calculated using top-down data and numbers calculated using bottom-up data. Without accurate numbers, the first transaction of the Guangdong trading scheme was based on expected future carbon emissions, rather than historical data. Improved statistical methodology and political action will be required to boost the reliability of carbon emissions data in China. China will also need specific laws to ensure transparent reporting and strong enforcement to prevent fraudulent or misleading claims about carbon emissions.

Chinese Carbon Tax on the Horizon

On the climate front, the Chinese government appears to be on the verge of taking a critical step which has been demonized by politicians in Canada and the USA – that is, implementing a carbon tax. Although the carbon tax is expected to be modest, China plans to also increase coal taxes.

According to Jia Chen, head of the tax policy division of China’s Ministry of Finance (MOF), China will proactively introduce a set of new taxation policies designed to preserve the environment, including a tax on carbon emissions. In an article published on the MOF web site in February 2013, Jia wrote that the government will collect an environmental protection tax instead of pollutant discharge fees, as well as levy a tax on carbon emissions. The local taxation authority will collect the taxes, rather than the environmental protection department. The article did not specify the level of carbon tax or when the new measures will be implemented. In 2010, MOF experts suggested levying a carbon tax in 2012 at 10 yuan per tonne of carbon dioxide, as well as recommended increasing the tax to 50 yuan per tonne by 2020. These prices are far below the 500 yuan (US $80) per tonne that some experts have suggested would be needed to achieve climate stability.

It is not anticipated that China’s plan will have a significant impact on global climate change, although the tax may have some beneficial impact within China itself, where air pollution is a serious problem. A paper from the Chinese Academy for Environmental Planning suggests that a small tax could still raise revenue and provide an incentive to reduce emissions, thus bolstering China’s renewable energy industry.

To conserve natural resources, the government will push forward resource tax reforms by taxing coal based on prices instead of sales volume, as well as raising coal taxes. A resource tax will also be levied on water. In addition, the government is also looking into the possibility of taxing energy intensive products such as batteries, as well as luxury goods such as aircraft which are not used for public transportation.

California Holds Successful First Auction of Carbon Allowances

The California Air Resources Board (CARB) held its first auction on November 14, 2012 for the purchase and sale of carbon allowances for its planned cap-and-trade regime. Mary Nichols, chairman of CARB, declared the auction a success:

“The auction was a success and an important milestone for California as a leader in the global clean tech market. By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future. That means new jobs, cleaner water and air – and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient.”

The auction results were released to the public on November 19^th (available online) . A tonne of carbon for the 2013 vintage year sold for $10.09, which is slightly above the $10.00 price floor set by CARB. The highest bid was a whopping $91.13. Also, there was three times the number of bidders at the auction than actual buyers, indicating a healthy and competitive market. Furthermore, 97% of allowances were purchased by regulated entities indicating that prices were not influenced by speculative buyers. Instead, it seems to indicate that regulated entities are looking to retire allowances for compliance purposes. Perhaps most importantly, the auction sold out with all 23,126,110 2013 vintage year allowances being purchased, raising approximately US$233 million. This auction kicks off the largest carbon market in North America and the second largest in the world, behind the European Union Emissions Trading Scheme.

California’s partners in the Western Climate Initiative (WCI) – including British Columbia, Manitoba, Ontario, and Québec – are no doubt paying close attention. Apart from Québec, which will launch its emissions trading system on January 1, 2013 with California, the success of California’s cap-and-trade program may spur the other WCI partners into action to implement a similar scheme.

California to hold First Auction of GHG Emission Allowances on November 14, 2012

Bill AB 32 requires California to reduce greenhouse gas emissions to 1990 levels by 2020. The cap and trade regulation (“Regulation”) is a key element of California’s climate plan. The Regulation is designed to provide regulated entities with the flexibility to seek out and implement the lowest cost options to reduce emissions. California’s cap and trade program will be second in size only to the European Union’s Emissions Trading System based on the amount of emissions covered. In addition to driving emission cuts in the ninth largest economy in the world, California’s program will provide critical experience in how an economy-wide cap and- trade system can function in the United States.

It is anticipated that California’s emissions trading system will reduce greenhouse gas emissions from regulated entities by more than 16% between 2013 and 2020. Starting on January 1, 2013, the Regulation will apply to large electric power plants and large industrial plants. In 2015, it will extend to fuel distributors (including distributors of heating and transportation fuels). At that stage, the program will encompass around 360 businesses throughout California and nearly 85% of the state’s total greenhouse gas emissions.

Under a cap and trade system, companies must hold enough emission allowances to cover their emissions, and are free to buy and sell allowances on the open market. As part of the cap and trade program, the California Air Resources Board (ARB) will hold allowance auctions to allow market participants to acquire allowances directly from ARB. ARB will conduct the first auction on November 14, 2012 from 10am to 1pm PST. ARB will also conduct the first quarterly reserve sale on March 8, 2013. Auction participants will have to apply to participate in an auction, or submit a bid for reserve sales, and meet financial regulatory requirements in order to participate in an auction or reserve sale.

The November 14^th auction will mark the beginning of the first greenhouse gas cap and trade program in the United States since the Regional Greenhouse Gas Initiative (RGGI), a cap and trade program for power plants in nine northeastern US states, held its first auction in 2008.

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 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.

The detailed auction requirements and instructions are available online

EU and Australia Agree to Link Carbon Trading Schemes

On August 28, 2012, the European Union (EU) and Australia announced their agreement to fully link their respective cap-and-trade schemes by 2018. In addition, Australia announced that it will drop its planned A$15 per tonne carbon credit floor price and it will limit the use of Kyoto Protocol eligible international units under the Australian scheme. Furthermore, Australia will set its price ceiling with reference to the expected 2015-16 price of European allowances. The combined effect is that cheaper EU carbon credits will be available for Australian emitters.

Under the arrangement, the European Commission will seek a mandate to negotiate a treaty on behalf of the EU by mid-2015 for the full linking of the emission trading systems from July 2018; the Australian Government has an existing mandate to negotiate such a treaty. As an interim arrangement, a partial link will be established to allow Australian businesses to source 50% of their emission allowances from the EU from July 2015. A similar allowance will be available for European emitters once the full link comes into effect no later than July 2018.

This is a welcome development for the EU trading scheme. Oversupply has driven the cost of carbon credits to record lows; currently, EU carbon trades at around US$10 per tonne. The opening of the market to Australian companies should help to alleviate this oversupply and with a carbon tax of A$23 per tonne, Australian emitters are welcoming the integration which will offer them a cheaper alternative. However, the Australian government continues to project that carbon prices will reach A$29 per tonne by 2015 and 2016.

California Completes Successful Trial Auction for Cap-and-Trade Program

In advance of the November 2012 launch of California’s carbon trading scheme, the state’s Air Resources Board (ARB) completed in August a successful trial of its carbon allowance auction system, where companies pretended to bid for carbon allowances in order to test out the system ahead of its official launch on November 14, 2012. According to ARB officials, the trial auction ran smoothly, with approximately 150 companies submitting bids during the simulation.

Following the roll out of the platform in November, more than 400 companies will be able to buy and sell carbon credits through quarterly auctions. From 2013, a statewide cap on carbon emissions will be imposed. This cap will be gradually lowered year-on-year, thus providing companies with a financial incentive to curb their greenhouse gas emissions.

Under the planned scheme, companies will need to hold carbon allowances to cover their own emissions and they will be required to purchase additional allowances if they exceed their cap. In the first year of the scheme, the ARB plans to give away the vast majority of credits and auction only 10% in order to put a price on carbon. However, the amount of free carbon allowances will be reduced each year so that by 2020, 50% of allowances will be auctioned, providing a clear price signal for firms to invest in low emission technologies.

Québec Prepares to Start Emissions Trading as it Formally Adopts Cap-and-Trade Regulation

On December 14, 2011, Québec formally adopted the Regulation respecting the cap-and-trade system for greenhouse gas emission allowances (the Regulation), which came into force on January 1, 2012 and is based on the rules established by the Western Climate Initiative (WCI).

With the adoption of the Regulation, Québec officially steps to the starting line next to California. The first year of implementation of the system will be a transition year, which will allow emitters and participants to familiarize themselves with how the system works. In particular, 2012 will provide emitters and participants with opportunities to register with the system, take part in pilot auctions and buy and sell greenhouse gas (GHG) emission allowances in the market. No reduction or capping of GHG emissions will be required during this transition year. Over the course of the year, emitters will also be able to make any adjustments that may be necessary to meet their emission reduction obligations, which will come into force on January 1, 2013. Starting on January 1, 2013, some 75 operators in Québec (primarily in the industrial and electricity sectors) whose annual GHG emissions equal or exceed the annual threshold of 25,000 tonnes of carbon dioxide equivalent (CO2e), will be subject to the capping and reduction of their GHG emissions.

It should be noted that starting in 2015, companies which import or distribute in Québec fuels that are used in the transportation and building sectors (and whose combustion generates an amount of GHGs greater than or equal to 25,000 tonnes of CO2e per year) will also be subject to the capping and reduction of their emissions.

For all participating WCI members, the adoption of a cap-and-trade regulation a cap is the first of two key steps towards the establishment of a regional North American carbon market. The second step will consist of concluding a series of recognition agreements, among the different partners, to link their systems together.

BC and Ontario in the meantime continue to dither on whether to join the cap-and-trade scheme and businesses in those provinces are losing out on key opportunities to participate in the transitional market, recently valued for 2012 at almost US$ 800 million by Thomson Reuters Point Carbon. By finalizing their cap-and-trade regulations in a timely way, BC and Ontario could continue to be leaders in regional efforts to reduce GHG emissions and to spur technological innovation in their provinces.

Study finds that cap-and-trade more likely to trigger clean tech adoption than carbon tax

A study by Professor Yihsu Chen at the University of California Merced has found that a cap-and-trade system is more likely than a carbon tax system to trigger the adoption of clean energy technologies. The study, which was coauthored by Chung-Li Tseng of the University of New South Wales in Australia and that is published in the Energy Journal Volume 32, Number 3, 2011 (a quarterly journal of the International Association for Energy Economics) also found that the volatile pricing of a cap-and-trade system could lead to earlier adoption of clean technology by firms looking to hedge against carbon cost risks.

The study used economic models based on a framework of real options to determine the optimal timing for a coal-burning firm to introduce clean technologies using the two most commonly considered policies: (1) cap-and-trade, in which carbon emissions are capped and low-emission firms can sell excess permits to high-emission firms; and (2) carbon taxes, which employ a fixed monetary penalty for per-unit carbon emissions.

According to Professor Chen, “…cap-and-trade offers ‘carrots’ while taxes offer ‘sticks’. Cap-and-trade induces firms to explore profit opportunities, while taxes simply impose penalties to turn clean technology into a less costly option.”

For the study, researchers considered the scenario of a small firm that owns a coal-fired power plant and is obliged to supply power to its customers. They compared cap-and-trade and carbon tax models in determining when the firm would choose to add a natural gas power plant – a relatively clean energy resource – in order to meet its energy demands while maximizing its long-term profits. The study found that the cap-and-trade model triggered the adoption of clean energy technology at a lower overall carbon price than a tax policy did. Further, the study found that the volatility of non-fixed permit prices was the key difference that led the firm to add a natural gas plant earlier than it would have under a more predictable tax system. Professor Chen said that: “Based on our study, mechanisms designed to reduce cap-and-trade permit prices or suppress price volatility — which have been implemented in existing cap-and-trade programs like the Regional Greenhouse Gas Initiative — are likely to delay clean technology investments.”

Québec releases draft cap-and-trade regulation

On July 6, 2011, Québec’s Ministry of Sustainable Development, Environment and Parks announced the publication of a draft regulation to facilitate the implementation of its cap-and-trade system based on the Western Climate Initiative (WCI) guidelines. The regulation is now undergoing public consultation for a period of 60 days.

The regulation to be adopted following consultation will enable Québec to implement its carbon market as early as January 1, 2012. The first year will be transitional in nature, allowing emitters and market participants to familiarize themselves with how the system will work. They will be able to register as system users, take part in pilot project auctions and buy/sell greenhouse gas emission allowances through the market. This phase will also enable partners to make any required fine-tuning in order to make a smooth transition to their obligations under the cap-and-trade system that will come into force on January 1, 2013.

Industrial facilities that emit 25,000 or more tons of carbon dioxide equivalent annually will be subject to the system for capping and reducing their emissions.

The draft regulation is available here.