The world’s carbon markets are one of the climate change fight’s biggest stories, and they’ve never been stronger. Cap-and-trade systems combined with carbon taxes to cut emissions and invest billions in clean energy technologies, while expanding to over 40 national and regional jurisdictions in 2014.
While 1,000 companies and 84 governments support carbon pricing, market growth is in a tenuous position moving forward, and this year is sizing up to be a make-or-break year for carbon markets in combating climate change. While any one system is deserving of in-depth examination, I think these four questions will determine international carbon market growth in 2015.
Are California and Quebec creating a North American market?
California’s carbon market was arguably the world’s biggest cap-and-trade story in 2014. From selling out all available current and future allocations across four auctions, to setting a record $12.10 per ton allocation clearing price in the final 2014 auction, or generating $1.2 billion for clean energy investment across the year, to linking with Quebec, the Golden State’s cap-and-trade system has momentum heading into 2015.
Really, the question isn’t if California can sustain its success, it’s how high can it go? The first successful international carbon auction, held with Quebec in November, demonstrated carbon markets get stronger as they expand in size and reach across borders. California also joined Oregon, Washington State, and British Columbia in a Pacific Coast Collaborative to address climate change in 2014, and developing carbon markets in coordination with each other is a central tenet of the agreement.
Washington State’s governor has already proposed a statewide cap-and-trade plan to fund infrastructure improvements, while British Columbia’s carbon tax has been functional since 2008, a carbon tax referendum may appear on Oregon’s ballot as soon as this fall, and Quebec has hinted at efforts to pull in other Canadian provinces and U.S. states. If California and Quebec continue their upward trend, we may soon have a true North American carbon market.
Will RGGI double in size?
North American carbon market growth may not be limited to California and Quebec in 2015 – the Regional Greenhouse Gas Initiative (RGGI) may also be expanding. RGGI has been in operation since 2008 and strongly rebounded this year after adjusting its 2014 carbon budget to reflect changing energy supply and demand, sell out of all allocations over the year, and hit $5.21 per ton in the final 2014 auction – a record high for the system’s 26 auctions.
But rebounding demand and prices aren’t the real 2015 variable for RGGI – it could theoretically double in size by adding Pennsylvania. The state is America’s third-largest carbon emitter, only gets four percent of its power from renewables, and generates more emissions than the other nine combined RGGI states. Clearly, adding Pennsylvania would increase allocation demand and prices while creating myriad new clean energy investment opportunities.
The Keystone State has never been a part of RGGI, but incoming Democratic Governor Tom Wolf pledged to join the system during last year’s election. He’ll need to overcome a Republican-held state legislature, but touting a piece of the nearly $2 billion in auction revenue already allocated to member states may sway conservative legislators. And if power sector cap-and-trade can work in Pennsylvania, other fossil-dependent states may be more amenable to EPA Clean Power Plan implementation – regional carbon markets could be a key option to affordably cut emissions.
Can the EU implement meaningful ETS reform?
Of course, any outlook on carbon markets must include the European Union’s Emissions Trading System (EU ETS). Not only is it the first and largest functional global carbon market, spanning 11,000 power stations and factories across 31 European nations, but it’s also been one of the most maligned.
EU ETS prices plummeted to record lows in 2013, but strongly rebounded in 2014 after a “backloading” proposal temporarily cut a carbon allowance oversupply nearly in half by postponing 900 million permits from auction. This oversupply occurred when the global economic slowdown intersected with expanding renewables and an inflexible system structure based on outdated market conditions.
EU ETS carbon allowance prices rose 48 percent in 2014 on the strength of backloading, but again, this was a temporary measure and the system’s ultimate fate hinges on what action happens next. Potential fixes include reducing free allowances, permanently cancelling withheld allowances, setting rules-based price stabilization mechanism, or creating a “market stability reserve” to hold a percentage of oversupplied allowances – but none seem to have built consensus. Whatever the action, the world’s largest carbon market is also its most imperiled.
How will China’s national carbon market take shape?
The world’s largest carbon market wildcard remains held by the world’s largest carbon emitter – China. Seven regional cap-and-trade markets went online since 2013 with positive initial results: 13.75 million metric tons traded last year generated $81 million in revenue, while carbon intensity fell five percent in the world’s second-largest carbon market.
These seven regional markets covering 1.5 billion tonnes of carbon emissions were always intended to function as a pilot program for China’s central government to test how cap-and-trade would work across the country, with the outcomes applied to an eventual national system. That imperative became even more important when China announced it would launch a nationwide carbon market in 2016 as part of its pledge to cap emissions by 2030.
So far, the regional market outcomes have been mixed, with some systems reporting active trading but other complaining of opaque pricing. Combine these growing pains with a legacy of national corruption, and China’s ultimate market rules and setup promise to be one of the biggest climate developments in 2015. Good thing, then, that California is working with Chinese regulators on carbon market design – if all goes according to plan, the market could be valued at an incredible $65 billion by 2020.