Audio Blog: Latest Innovations in ESG Investing

Colin Shaw at Sustainatopia discussing ESG investing
From left to right: Colin Shaw, Jason Escamilla, Catharine Banat, Megan Fielding, and Andrew Olig

Four Twenty Seven’s Director of Finance, Colin Shaw, was recently invited to be a part of a panel titled “Latest Innovations in ESG” at Sustainatopia on May 8th, 2017.

The panelists discussed the increasing awareness of investors in their options to invest responsibly, and breaking down the preconception that ESG investing sacrifices financial returns. Colin presented on the tools to used measure climate risk in financial portfolios, and the need that Four Twenty Seven sees for more climate data in order to better provide guidance to businesses for their risk management and adaptation planning. The other panelists included:

  • Andrew Olig, Regional Vice President of Calvert Mutual Funds
  • Megan Fielding, Senior Director, Responsible Investment at TIAA Investments
  • Catherine Banat, Impact Investing at RBC Global Asset Management
  • Jason Escamilla, CEO of Impact Labs

Listen to the entire engaging panel recording below.

Redefining Climate Risk

Comment Letter from Four Twenty Seven to Task Force on Climate-Related Financial Disclosures. (Download full letter here)

May 23, 2016

Dear Chairman Bloomberg,

Four Twenty Seven, Inc., a climate resilience research and advisory firm, is pleased to submit this letter of comment for your consideration and to help inform the work of the Task Force on Climate-Related Risk Disclosures (TCFD) during Phase II.

We commend you for the important work undertaken by the TCFD and your deliberate efforts to engage practitioners and stakeholders in providing input along the way. Providing guidance around climate risk disclosures is a critical step not only to help ensure financial markets will not be blindsided by predictable risks, but also to ensure that investors send the appropriate price signals to the decision-makers for the underlying assets – from corporate boards to public officials and real estate owners — thus providing an incentive to better prepare for and adapt to the physical impacts of climate change.

Our comments stem from years of working closely with Fortune 500 corporations to help them understand climate change impacts, quantify risk and monetize costs. We anticipate this type of analysis will need to become widespread for corporations to comply with the forthcoming guidance from the TCFD, and wanted to share our lessons learned from our past work.

Our comments, detailed below following the questionnaire structure, center around two key takeaways:

  1. The need to redefine climate risk to better account for direct and indirect risks related to the physical impacts of climate change. Regulatory, technology or transition risks are by no means confined to greenhouse gases, and focusing a disclosure framework only on extreme weather events and direct physical impacts would be deeply misguided. It is critical that corporations understand, address and disclosure their exposure to risks and opportunities related to transition risk due to:
  • Regulatory changes driven by climate change (e.g. changes in underground water regulation, permitting, zoning, etc.);
  • Costs and revenues associated with finding and deploying adaptive technologies to improve corporate resilience, mitigate risk exposure and promote more efficient resources use;
  • Costs associated with capital expenditure, retrofitting or moving facilities, infrastructure and other critical assets out of harm’s way.
  • Costs and revenues associated with increasing the company’s adaptive capacity, ranging from increased legal and insurance costs to investments in human capital, supply chain risk management, engagement with local governments to support climate adaptation efforts, and other public-private partnerships.
  • Macro-economic and financial risk for property owners, market risks for certain products, etc.


  1. The need to incorporate climate data into decision-making processes and provide vulnerability assessments at the asset-level for both corporations and investors.
  • Corporations need to utilize fully the wealth of climate data and projections that are available, and leverage sophisticated techniques and models to incorporate uncertainty into their decision processes.
  • Climate risk analysis must be performed at the asset-level, even if the final disclosures do not include all the asset-level data, and should rely on common standards, assumptions and scenarios to enable comparison across assets and across markets.
  • Risk assessments should be subject to third-party verification to ensure they are complete and cover all the material risks.

Download Four Twenty Seven’s Comment Letter (FourTwentySeven_PhaseI_CommentLetter) for our detailed analysis on climate risk reporting.

What are businesses doing to prepare for climate change?

Climate change has brought millions of dollars of damages to businesses over the past years, yet little is known about how businesses are preparing and planning for the physical impacts of climate change going forward.

Four Twenty Seven, in partnership with the University of Notre Dame Global Adaptation Index (ND-GAIN) and with support from Business for Social Responsibility (BSR), have launched the first annual State of Corporate Adaptation survey. The survey will provide a timely analysis of how businesses are addressing the need to adapt complex business operations to a changing climate.


  • How are global corporations preparing for climate change impacts?
  • What are the most pressing climate risks for your sector?
  • How are your competitors planning for extreme weather events?
  • What climate impacts should you be monitoring and why?

These are some of the questions at the heart of our research – this year’s answers and analysis will provide valuable insight for companies struggling to prioritize sustainability activities and will create a solid foundation to advance best practices in corporate adaptation.

While the public, nonprofit and philanthropic sectors have made great strides on issues associated with adaptation planning and implementation in recent years, the status of resilience building in the private sector is unclear at best. The CDP has successfully motivated some companies to prioritize transparency in sustainability reporting, however, as our climate continues to change, it becomes more and more imperative that we have a collective understanding of current corporate adaptation activities and the barriers that are inhibiting real progress.

Understanding how the private sector is preparing for the impacts of climate change is crucial to socio-economic resilience at large.
Climate adaptation will require public-private sector collaboration.

As our understanding of global climate risks continues to grow, companies are struggling to efficiently prepare for climate induced shocks and stressors that threaten global economic stability. In recent years, the CDP supply-chain analysis has shown that more than 70 percent of corporate respondents anticipate that climate impacts will disrupt their supply chains.

Our goal is to further our collective understanding of the challenges corporations face when addressing climate risk as well as to highlight best practices and potential strategies that advance resilience building across sectors and communities.

We know that the potential costs of corporate inaction are great. Missed opportunities to reduce recovery costs, increase resilience and leverage public sector adaptation efforts are not only unfortunate, but could greatly diminish the private sector’s ability respond to climate threats in a way that keeps our economy thriving.

The first annual State of Corporate Adaptation survey will create a critical baseline of knowledge for all stakeholders and will highlight the issues that are most critical to corporations striving to stay competitive in a changing climate.

The completely anonymous survey results will be summarized to reveal important insights and will be released in a public report along with practical guidance and ideas for next steps in corporate adaptation at the National Adaptation Forum on May 11th, 2015.

Help support our collective understanding of business climate resilience, take the survey now.

About the partnership:

ND-GAIN is a university research center dedicated to enhancing the world’s understanding of the importance of adaptation and facilitating private and public investments in vulnerable communities, Four Twenty Seven is a climate risk analytics and adaptation firm, and BSR is global nonprofit business network dedicated to sustainability. We work with companies and organizations around the globe to address climate risk and build resilience and conduct research to advance these efforts.

For more information on the survey or to provide additional feedback please contact Aleka Seville.

A Fuel Carbon Tax for California?

After a fairly quiet start to the year, the California market saw an increase in activity last week as the first auction of the year coincided with the last days to file bills in the California legislature. One such bill filed last week proposes to remove transportation fuels from the cap-and-trade program and impose instead a tax on gasoline starting in 2015, and was opportunely leaked right when the auction was in process, on Wednesday February 19 midday.

Auctions: All Quiet on the Western Front

Auction participants seemed – thankfully – unfazed by the surprise proposal, if they even heard of it in time, and the auction cleared slightly below secondary market prices, in line with expectations. The current auction for V14 allowances cleared at $11.48 a ton, just 14 cents above the 2014 reserve price of $11.34 a ton, while the advance auction for V17 allowances saw a clearing price of $11.38. All of the 15.5 million V14 and 9.3 million V17 allowances sold out. The auction raised $175 for the benefit of ratepayers and $130for the GHG reduction fund. This confirms our forecast that the state is on its way to raising at least $529 million in fiscal year 2013-2014.

The bid-to-supply ratio was lower than at previous auctions, but the volume offered was quite a bit higher, for a total of 71 participants, also lower than at previous auctions. It is impossible to say if the bill leakage had any impact on the auction – in our view, the slight drop in interest is to be expected in a long market and not reflective of last minute rumors on possible changes to the program design.

Cap-and-Dividend, Here We Go Again…

While the market impact was limited, the fuel tax bill garnered quite a bit of media attention. The bill comes from the office of State Senator pro tempore Darrell Steinberg, a powerful Democrat who represents the Sacramento region and is supportive of California’s climate policy. Steinberg’s main concern is the risk of spikes and wild fluctuations in gas prices due to the carbon market, which he argues would affect disproportionately the low and middle-income families through higher energy costs. According to the Senator, such fluctuations would also give fodder to the fire of climate change skeptics who “[would] use the crisis to unravel AB 32 and weaken our essential climate goals.”

To remedy these concerns, the bill proposes to establish a carbon tax starting at 15 cents a gallon in 2015, rising to 24 cents a gallon in 2020, which is roughly equivalent to carbon prices of $16 a ton in 2015, rising to $25 a ton in 2020. The bill supporters argue that this would provide better price certainty, slightly higher than the reserve price, and without the upside price risk of the market.

In addition, the bill proposes to return most of the carbon tax revenues to poor and middle-income California families through a new state Earned Income Tax Credit, and inject the remaining revenues into a multi-billion dollar 21st century development of California’s mass transit infrastructure. This stands in contrast with the use of the auction revenues, which by law must be entirely spent on emission reduction efforts, and per the Governor’s proposed budget, would see over two thirds of the monies go to clean transportation and sustainable communities investments rather than tax credits.

Market Implications

None of the bill’s ideas are bad per se – a carbon tax is a very respectable way to price carbon, and returning revenues to poor household is certainly an important concern. The only real problem with this bill is that we’re in 2014, over one year into the program and ten months before the start of the second compliance period (CP2) and the inclusion of fuels under the cap. Such a proposal would have been fine to consider in 2008 while the Scoping Plan was studying at length the merits of cap-and-trade vs. carbon tax. Right now, it is disruptive and possibly counterproductive.

Disruptive because reopening Pandora’s Box so late in the game creates uncertainty for market participants and discourages long term investments, and counterproductive because it could potentially cause short term volatility on the market. Indeed, fuel providers are already actively buying allowances to prepare for next year’s compliance obligation. Sending mixed signals less than a year before CP2 creates uncertainty not just for fuel providers at a loss of how to best prepare for compliance, but also indirectly for all the other compliance entities wondering what the implications might be in terms of liquidity and volatility for them.

If fuels were actually excluded from the cap, the market would remain its current size instead of doubling overnight, leaving only power plants and industrial facilities in the program. This would mean a continuation of the market as we know it today, with low liquidity and limited offset demand. Also, a smaller market can be more prone to volatility due to changes in the demand side price drivers – for example, a heat wave would have a comparably larger impact in a market where the power sector drives over half of the demand than it would in a much larger market with more sectors covered.

As it stands, the market mostly shrugged the news, sliding down a few cents on Thursday, possibly on the back the proposed bill, but this could change if some of the bill’s provisions gained traction. Yet an extended discussion on the fate of fuels under the cap could create a sluggish buyer mood and hamper liquidity in an already slow market until the road is clear for fuel distributors to enter unreservedly the market.

A Low Probability, High Consequence Event

The bill in its current form is very unlikely to pass. In California, a new tax needs a 2/3 majority in the Legislature. Democrats have a bare majority, and Governor Brown has said: “now is not the time for new taxes”. He and the Legislature face elections later this year. Furthermore, most environmentalists oppose the bill, and while the fuel trade associations have expressed interest in the bill, they’re not openly leading the charge. All of these mean the bill’s odds are very, very low.

Yet the fact that the President of the Senate is willing to propose changes to the design of the program at this point in time is something worth paying attention to. While a fuel tax is unlikely to go anywhere, a bill requiring the Air Resources Board to impose a tighter price collar or offering an alternate compliance mechanism through a flat fee for fuel providers would not necessarily require a super majority. Neither would a bill to remove fuels from the cap entirely, for example if gas prices endured a sudden or significant increases and legislators faced urgent and widespread calls to act.

The bill also signals the Democrats are intent on seeing their spending priorities better reflected in the investment plan for carbon auction revenues. The Governor’s focus on the high-speed train is not exactly popular in the State Capitol, and many legislators would like to see more revenues directed to poverty reduction, possibly through a climate dividend, and mitigation of general cost of living increases. The amount of money forecasted to be raised from the carbon auctions, over ten billion dollars cumulative through 2020, should and will undoubtedly be the object of a healthy democratic debate in the Legislature this spring.

At this point however, it would be best for the success of the cap-and-trade program if this debate were limited to revenue allocation. One of the best ways to ensure price stability in the carbon market is to provide policy certainty, and questioning core design elements of the program at this point in time may not conducive to the price stability the bill seeks to foster.

Emilie Mazzacurati

Outlook for 2014 California Cap-and-Trade: Politics Take the Center Stage

After a year of incremental regulatory action, 2014 promises to be a year ripe in political developments for California’s cap-and-trade program and climate policy in general. From Sacramento to Washington, DC, we examine key expected developments for the New Year and their potential impact on the California carbon market. You can also download our nifty California Carbon Calendar 2014.

Political Outlook

Complementary policies remain high on the political agenda on both sides on the aisle, and have the most direct potential impact on market balance and prices.

Low Carbon Fuel Standards and Fuels under the Cap

We expect the oil industry will continue its push to delay or amend the Low-Carbon Fuel Standard (LCFS). In court, the Rocky Mountain Farmers Union v. Goldstene case, which caused a temporary stay of the LCFS program earlier this year, has been remanded to District Court after the Court of Appeal judged the program did not discriminate. The revised Court decision is expected in 2014. Any delay or significant change to the program’s compliance schedule would lead to higher emissions in California, and potentially drive prices up on the market.

We also expect the oil industry to continue arguing in the Legislature for free allocation and/or a delay in the inclusion of the fuels in the program. The latter seems less likely, as it would appear as a significant setback for California climate policy, and therefore is unlikely to garner enough support either in the legislative or in the executive branch. Allocation to fuels, on the other hand, is sure to be high on the agenda, and if left to ARB will likely involve fewer free allowances than if legislators have a say.

Renewable Portfolio Standard, Clean Energy and Energy Efficiency Investments

As utilities are well on track to meeting their 33 percent renewable procurement target for 2020, the Legislature started in 2013 a discussion on going above and beyond the 2020 target and setting a more ambitious target – 51 percent – for 2030. We expect similar legislation to resurface in 2014, and the primary holdup against passage is likely to be technical rather than political, as utilities are concerned about ensuring grid stability and reliability with such a high level of renewable integration. A more ambitious RPS would lower emissions in California in 2020 and beyond, and would contribute to keeping prices low in the carbon market.

Revenues from Prop 39 and its implementing legislation have started flowing, with $106 million going to California public schools in 2013. The revenue stream is expected to increase, with up to $500 million going to energy efficiency and clean energy investments yearly over the next five years.

Prop 39 revenues come in addition to the auction proceeds, which must be invested in emission reductions as well. The fate of the fund is in the Governor’s hands, but assuming funds will be directed towards their intended purpose, both investments will contribute to curbing emissions and prices. (Read our recent analysis on budget politics.)


The conversation on offsets was largely dominated by SB 605 in 2013, a bill that proposed to restrict offsets to projects in California. We expect similar legislation to be introduced again in 2014, which would carry a risk of driving prices high by creating sudden scarcity in offset supply. Criticisms and questioning of protocols for mine methane and rice cultivation also meant neither protocol got approved in 2013.

We expect 2014 will see a continuation of ARB’s work on new protocols, with mine methane most likely to make it in the regulatory amendment package in the spring. We don’t anticipate any major breakthrough on REDD, in spite of the excellent guidelines laid out by the REDD working group in July 2013. Offsets in general and REDD in particular remain a contentious topic for a number of environmental organizations, and we expect continued push back from these organizations, and the same commitment to extreme caution from ARB.

Post-2020 Policies and Emission Reduction Target

The single most important development for the short and long-term health of the carbon market is the setting of a clear target and policy framework post-2020. ARB has clearly indicated in the October 2013 draft Scoping Plan Update that cap-and-trade would continue past 2020, but stopped short of setting a target for 2030 and beyond. We expect 2014 will see the 2030 target rise on the political agenda – Sen. Fran Pavley, Chair of the CA Senate Select Committee on Climate Change & AB32 Implementation, indicated early December that she would consider sponsoring legislation to establish long term reduction targets for the state.

Climate policy could well become a key issue in the 2014 gubernatorial campaign. Gov. Jerry Brown is said to prepare an announcement as part of his platform for his (likely) re-election campaign. Climate change is high on the agenda for California voters, with 65 percent supporting AB32 goals and policies and saying the government should do more. Gov. Brown sports high approval ratings, 49 percent of likely voters as of December 2013, down from 54 percent in July, and has made climate and clean energy a priority for his administration. Yet his re-election could be challenged, especially in the context of California’s new Top 2 primary system. The 2014 gubernatorial election could play a significant role in bolstering or reshaping California climate policy, which could impact the carbon market as well.

Federal & Global Climate Policy

2014 is also an election year at the federal level, but unless Republicans capture the majority in the Senate, we don’t expect a significant change of course in either direction, as the gridlock in Congress will continue to leave the initiative to the President. The Environmental Policy Agency (EPA) is chugging along on its GHG regulations under the Clean Air Act, which is generally supportive of and compatible with existing state programs (read our analysis on this topic)

It is probably fair to say that the global climate community is more interested in California than the other way round, but generally still worth mentioning that the expectations for the 2014 round of global negotiations are nil, as all eyes are on the December 2015 Paris Conference for a possible international agreement of a sort towards global carbon reductions.

Carbon Market Outlook

Regulatory Changes

Make no mistake – there are still quite a few loose ends to tie up on the regulatory front that will keep market regulators and emitters alike busy through the year.

  • As of January 1st, the linkage with Quebec will become effective, meaning that allowances and offsets issued by the Quebec government will gain full currency in the California market. The first joint auction should take place in May 2014 (not February), according to the Quebec government.
  • ARB staff needs to finalize the regulatory amendments discussed at length through 2013, which contain a variety of provisions addressing industry allocation and product benchmarking, market oversight and information disclosure, conflict of interest rules, cost containment, coal mine methane protocol, and more. Final amendments are expected in the spring.
  • 2014 will see the first partial annual compliance on November 1st, 2014. For the first time, emitters will have to surrender 30 percent of their 2013 emissions to ARB for permanent retirement. This should boost volumes in the secondary market ahead of the surrender deadline, and will be a good opportunity to check whether ARB has ironed all the kinks in terms of retirement order.
  • Who says compliance says emissions true up – ARB will be releasing historical verified emissions for 2013 in probably in the fall 2014, which will likely confirm that the market has indeed started with an excess of allowances compared to emissions.

None of these is expected to have a noticeable price impact except maybe for the CMM offset protocol, but their successful completion is integral to the proper functioning of the market and must be checked off the list.

Market Trends

We expect 2014 will see higher traded volume on the secondary market than in 2013, especially ahead of the partial compliance deadline in the fall 2014. As the second compliance period and its substantially larger cap draw near, we also anticipate oil companies will start buying larger volumes at auctions and over-the-counter. While fundamentals do not point towards a price increase, the sheer size of potential demand from fuel distributors compared to current size of the market could drive up prices a bit towards the end of the year.

We expect the primary market to continue to perform well, and all current and future allowances offered for sale at auctions to be purchased, mainly by compliance entities – in line with auction results so far.

For offsets, as ARB continues to issue compliance-grade offsets, and the market explores the many variants offered by the IETA-sponsored California Emission Trading Master Agreement (CETMA), we expect to see a little more activity in the secondary offset market. But we don’t anticipate a large increase in liquidity as offset contracts will remain, by design, not fungible.


2014 will bring plenty of opportunities for political changes, and derived policy changes, although in California the popular support for climate policy is such that change is likely to mean strengthening and deepening of current policies.

We also anticipate 2014 will see growing emphasis on the issue of climate adaptation. California is in the process of updating its state climate adaptation plan, and since the world is generally failing to address GHG emissions and global climate change, we anticipate climate adaptation will increasingly get people’s attention as the impacts of the changing climate are being felt in California and beyond.

Pin it to your desk! Download Four Twenty Seven’s California Carbon Calendar 2014

Politics of Carbon Auction Proceeds – The Battle Ahead

Carbon and the California Budget

The Governor’s office is busy preparing its proposal for the 2014/15 budget, which is due to the legislature by January 10th. After years of ongoing budgetary crisis, California is, for the first time in a decade, looking at a forecast of budget surpluses for the years to come. In November, the Legislative Analyst Office projected a $5.6 million budget surplus by June 2015.

While this year’s budget turned the corner with a projected surplus of over one billion dollars, California still face major budgetary challenges in fixing its education, social and prison systems, and paying back the so-called Wall of Debts, a massive amount of debts in the form of loans and deferrals to local communities and various state programs accumulated over the years.

One such loan came from the Greenhouse Gas Reduction Fund, established by AB32 and funded by proceeds from carbon allowances. The 2013/14 budget included a $500 million loan from the GHG Reduction Fund to the General Fund, arguing that the Air Resources Board (ARB) needed to complete the Scoping Plan Update first to ensure better investment decisions (see below for more on the Investment Plan).

The budget did not include a specific timetable for the loan repayment, indicating only that the loan would be “repaid with interest immediately when needed to meet the needs of the Fund.”. As the 2014/15 budget debate ramps up, the question is: what will the Governor do with 2014/15 auction proceeds, and when will last year’s loan be repaid and invested?

Politics of Carbon Investment Planning

The Governor’s Budget Proposal in January should include a proposal for the use of auction proceeds in 14/15, and possibly address the issue of borrowed funds in 13/14. The Governor has not given any indications at this point of what he intends to do with auction proceeds – past and future.

Meanwhile, the Democratic Caucus in the CA Assembly released on December 11 its budget blueprint, which mentions specifically cap-and-trade revenues as a means to bolster job growth. The same budget highlights as a priority the need to repay debts and loans promptly, which could bear on the auction proceeds loan. In parallel, a coalition representing California businesses, local government, health, transportation, economic justice and the environment called last week for the Governor to repay the $500 million loan.

A poll from the Public Policy Institute of California from July 2013 shows a large majority of voters favor spending auction revenues on public transit, such as more buses or reduced transit fares (78%), and repaving roads and highways (72%), and 83% support spending this money to support disadvantaged communities.

These positions indicate that the Governor may not get away with another ‘loan’ from the GHG Reduction Fund this time around. A clear commitment to invest auction proceeds this year would go a long way towards assuaging concerns that the loan would never be reimbursed – while another loan would revive fears of political holdup over the cap-and-trade revenues. As the Governor looks at a possible reelection campaign in 2014, we expect he will tread carefully and avoid a new loan so as not to taint his shiny environmental record.

Billions of Dollars at Stake

Why so much fuss, you might ask? The state of California has raised $532 million since the beginning of the program: $256 million in fiscal year 2012/13 and $275 million in FY 13/14. In our estimates, revenues for FY13/14 should add up to a little over that half million loaned to the General Fund, around $530 million. This amount, though, will almost triple overnight when the second compliance period starts and the cap rises to 400 million tons (from 165 Mt). Depending on market conditions, revenues could rise to about $1.5 billion in FY14/15 and to $2.4 annually in 15/16 and 16/17.

We developed three scenarios to illustrate a range of revenue estimates for the duration of the program (Figure 1), building on ARB’s estimate of state-auctioned allowance budget by fiscal year (see below for more details on the scenarios and results). For the sake of the budget discussion, we consider that our main scenario provides a reasonable, conservative forecast for revenues, totaling over $12 billion through 2020. This is no trivial amount, and how and when it will be spend will make a noticeable difference in California’s ability to reach its emission reduction targets.

Impact on California Emissions and Economy

recent study by the consultancy ICF International compares the benefits of different “revenue recycling” scenarios, looking at different “distribution” options – a lump sum to all California residents, free allocation to fuels (which would shrink by two-thirds auction proceeds in 2015-2020), and “investment” options – energy efficiency and clean transportation. The study finds investment options fare best for job growth and wages and economic growth, while the lump sum dividend is most beneficial to low income groups. The study also includes a ‘blended approach’ that attempts to maximize the benefits for all groups with a mix of investments and dividend.

The study does not quantify GHG reductions for each scenario, but investment options would logically fare better to distributive options. If $12 billion are invested as planned in energy efficiency, clean energy, and clean transportation over the next seven years, the impact on California emissions will be noticeable and should contribute to keeping carbon market prices low through the second and third compliance period. And as with any other investment, the sooner the investment starts, the larger the benefits down the road.


We expect the 2014/15 budget will provide for auction proceeds to be invested towards emission reductions, even if last year’s loan is not paid back immediately. With over a billion dollars to be spent in the next fiscal year, monitoring how the monies are spent will be crucial to forecasting the pace of emission decrease in California and supply and demand dynamics in the carbon market through 2020 and beyond.


Forecasting Revenues – Our Scenarios:

  • Our main scenario assumes a conservative clearing price at the reserve price through 2020.
  • Our ‘bearish’ scenario includes the same clearing price, but assumes that not all allowances get sold, as might be the case, for example, if emissions continue to decrease faster than the cap.
  • Our ‘bullish’ scenario assumes prices rise moderately to $30-40/ton through 2020 as the market anticipates deeper reductions post-2020.

Figure 1. Scenarios for Forecasting Auction Revenues
Source: Four Twenty Seven

In our ‘bearish’ and ‘main’ scenarios, revenues decrease after 15/16 as the decline in volume (cap and auction subscription rate) outweighs the slow increase in the reserve price. In our bullish scenario, the price effect makes up for the decrease in the allowance budget, except in 19/20 where no ‘advance auction’ occurs since the post-2020 has not been set yet.

Table 1. Auction Revenue Forecasts by Fiscal Year (million dollars)
CarbonAuction Revenues by FY
Source: Four Twenty Seven
Back to main article



Backgrounder: The Investment Plan

The implementing legislation for auction proceeds lays out a number of goals that the investments should further, ranging from the obvious – emission reductions – to larger policy goals, such as economic growth, job creation, and environmental and health benefits. The money could be stretched to fund state climate adaptation efforts, as another goal is to ‘lessen the impacts and effects of climate change on the state’s communities, economy and environment.” Last but not least, a percentage of the money is earmarked for projects that benefit disadvantaged communities.

In line with legislation passed in 2012, the Department of Finance submitted a Three Year Investment Plan for auction proceeds developed jointly with the ARB and other relevant agencies. This plan identifies three broad sectors that will be the focus of those investments, based on a gap analysis of California’s current greenhouse gas reduction strategy:

  • Sustainable communities and clean transportation
  • Energy efficiency and clean energy
  • Natural resources and waste diversion

The legislature will appropriate funding to State agencies, consistent with the three-year investment plan.

ARB is in the process of finalizing its Scoping Plan Update, which will include policy recommendations to reduce GHG emissions in these very sectors, so that part of the GHG Reduction Fund is logically expected to fund new measures to reduce emissions as proposed by ARB. Yet as of right now, with the Scoping Plan Update still in the works, the details of how the money will be spent within those sectors remain unspecified.
Back to main article

Smooth Sailing for California Cap-and-Trade

The launch of the California carbon market was watched with much scrutiny worldwide and in the United States. California is the 12th largest economy in the world, and its cap-and-trade program, with a cap over 400 million metric tonnes (Mt) in 2015, is the second largest compliance program in the world. California leaders are committed to setting an example for the nation and for the world of a tightly-run, ambitious emission trading program that would blaze the trail for other states and countries to follow. Given the state of disarray of the EU ETS and the Clean Development Mechanism (CDM), both vastly oversupplied, and the slow progress of climate policy at a U.S Federal level, the bar was high for California’s new program. Almost a year after the launch, how is California doing?

Healthy allowances trading

One of the biggest worries for the California was the potential lack of liquidity on the secondary market. With less than forty-five large emitters (over 500,000 t of annual emissions) in the first compliance period, the pool of potential market participants was fairly narrow, especially since a number of these emitters receive at least part of their allocation for free. Yet trading has proven healthy, with 377,480 t average daily volume year-to-date (YTD) for all vintages together, according data from the InterContinental Exchange (ICE) and Evolution Markets. (…)

Download and read the full article (PDF): 05 Smooth Sailing for California Cap-and-Trade

About this article:

This article was published as part of the International Emissions Trading Association (IETA) Greenhouse Gas Market 2013 report. The publication brings together carbon market professionals, policymakers, academics and NGOs to provide in-depth analysis and perspective on the main issues affecting carbon policy worldwide. IETA is global in its outreach and the publication features latest developments in current and emerging carbon markets, as well as taking a step back to consider the wider implications of climate policy design and implementation.

The Full Report of IETA Greenhouse Gas Market 2013 features the following articles:

The Markets: Existing Policies Around the World

1. EU ETS: The Cornerstone of Future EU Energy and Climate Policy? – Sarah Deblock, IETA and Ingo Ramming, Commerzbank
2. EU ETS Pricing and Trading Trends: Improving Outlook– Trevor Sikorski, Energy Aspects
3. Smooth Sailing for California Cap-and-Trade– Emilie Mazzacurati, Four Twenty Seven
4. Australia Carbon Policy Update – Martijn Wilder, Baker and McKenzie
5. Can the Obama Administration meet its Copenhagen Goals? – Tom Lawler, IETA and Bruce Braine, American Electric Power (AEP)
6. The Regional Greenhouse Gas Initiative: Building on Success – Colin O’Mara, Secretary of the Delaware Department of Natural Resources and Environmental Control
7. Canada’s Tradable GHG Intensity Standard for Oil and Gas: The implications of leading proposals – Dave Sawyer, EnviroEconomics, and Dale Beugin, IISD

The Future: Carbon Markets On The Rise

8. The Road to 2020: What Will We Get? – Pedro Martins Barata, Get2C
9. China’s Carbon Market. Where Next? – Wu Qian, British Embassy, Beijing
10. An Overview of Emissions Trading in Korea – Dalwon Kim, European Commission DG Climate Action
11. Kazakhstan’s developing ETS – an example of emerging carbon pricing schemes in the East – Friso De Jong, Janina Ketterer, and Jan Willem Van de Ven, European Bank for Reconstruction and Development (EBRD)
12. Market and Non-Market Approaches: A Hybrid Approach in Taiwan – Hui-Chen Chien, PhD, Taiwan Environmental Protection Administration, Wen-Chen Hu, Industrial Technology Research Institute (ITRI), Robert Shih, YC Consultants, Ltd.
13. Using Offsets Within the South African Carbon Tax Regime – Patrick Curran and Alex McNamara, Camco Global
14. Toward a cap on the carbon emissions of international civil aviation: One Step Forward in 2013 – Annie Petsonk, Environmental Defense Fund (EDF)

The Design: Examining What Makes Climate Policy Tick

15. Prospects for the World’s Offsetting Market – Can the Patient be Cured? Guy Turner, Bloomberg New Energy Finance
16. Fragmented Markets with Fragmented MRV Practices: Does it Matter? – Madlen King, Lloyd’s Register Quality Assurance (LRQA)
17. What’s Covered? Trends in Coverage of Different Sectors and Gases – Edwin Aalders, Det Norske Veritas (DNV KEMA)
18. The Cost of Carbon Pricing: Competitiveness Implications for the Mining and Metals Industry – John Drexhage, International Council on Mining and Metals (ICMM)
19. Case Study: California’s Response to the Lessons Learned from the EU ETS – Melanie Shanker and Chris Staples, Linklaters

The Bridges: Aligning Markets Within a Fragmented Architecture

20. Carbon Pricing, the FVA and the NMM: Charting a Course to a New UNFCCC Agreement – David Hone, Royal Dutch Shell PLC
21. The Linking Rainbow: Evaluating Different Approaches to Joining Carbon Markets – Anthony Mansell, IETA and Clayton Munnings, Resources for the Future (RFF)
22. Japan’s Joint Crediting Mechanism: A Bottom-Up CDM? – Takashi Hongo, Mitsui Global Strategic Studies Institute
23. Lessons from the PMR’s First Years and Looking Forward – World Bank PMR Secretariat
24. The B-PMR: One Year On – Mark Proegler (BP) and Karl Upston-Hooper (Greenstream)
25. Leveraging the Potential of the Voluntary Carbon Market as a Credible Tool for Mitigating Climate Change – Sophy Greenhalgh, IETA and International Carbon Reduction Offset Alliance (ICROA)
26. When Trade and Carbon Collide: WTO and Climate Policy Realities – Elisabeth DeMarco, Norton Rose Fulbright

The Tools: Financing Low Carbon Development

27. Financing the Transformation: The Importance of the Private Sector – Paul Bodnar, United States Department of State
28. Adding to the REDD Finance Toolbox – Charlie Parker, Climate Focus
29. NAMAs: Aligning development imperatives with private sector interests – Frédéric Gagnon-Lebrun and Jorge Barrigh
30. The Green Climate Fund: Paradigm Shift or Incremental Improvement? – Gwen Andrews, Alstom
31. Analysing the Potential for a CDM Capacity Fund – Joan MacNaughton, IETA Fellow and Vice Chair, UN High level Panel on the Policy Dialogue on the CDM
32. Towards Supranational Climate Tax or Levy: The Case of the Adaptation Fund – Laura Dzeltzyte
33. Private Sector Finance for Adaptation – Gray Taylor, Bennett Jones LLP


Picture credits: Robert Bissett, Smooth Sailing

Should Climate Risk Be Included in Sustainability Reports?

Historically, sustainability reporting has been largely about the firm’s impact on society and the environment. Is the firm using up a lot of resources? Polluting? How does it impact local communities’ lives and livelihoods? How does it treat its employees? And so much more. Recently though, stakeholders have also been asking for disclosure on risks and opportunities related to climate change. Are the firm’s operations at risk for a Category 5 hurricane? Will its supply chain be impacted by more frequent floods in Bangladesh? How will the firm procure water or agricultural goods in a dryer world? How will it pay for shipping in a world with high carbon prices?

It could be argued that including climate change impacts into sustainability reports turns sustainability reporting on its head: when a firm reports on the impact climate change may have on its operations, supply chain or business model, it is really reporting on the impact of the environment on the firm, not the other way round. So, should climate risks be included in sustainability reports?

This blog post was originally published on Triple Pundit – read the full article.

Impact of SB 605 on the California Carbon Market

SB 605 as revised July 3rd, 2013 would restrict offset projects in the AB 32 cap-and-trade regulation to projects based in California. Such a restriction would cut available offset supply by 70 to 90 percent compared to current projections, worsening the expected shortage of credits available for use in the California carbon market, and escalating credit and allowance prices.

While offset protocols for U.S. projects approved and under consideration are forecasted to meet between 30 and 70 percent of total demand, supply from California-based projects would likely meet no more than 6 to 16 percent of cumulative demand for credits through 2020. The offset shortage makes it very likely (over 60 percent chance) that prices would reach the highest tier of the APCR in 2020, $82 a ton.

Yet higher prices in the carbon market are unlikely to incentivize a significant number of new offset projects in California due to institutional, regulatory and technical hurdles.

Download the full report Market Impact of SB 605.

California to Link with Quebec

On March 22, the California Air Resources Board (ARB) released proposed amendments to the cap-and-trade regulation that will authorize ‘linking’ with other jurisdictions – starting with Quebec in 2014. The release signals that the Governor should shortly issue the much-awaited findings authorizing ARB to officially link with Quebec. What does this mean for California, and how is this going to change the market?

Why Quebec?

No offense to our Northern neighbors, but it’s a fair question for folks who haven’t followed the ups and downs of North American climate policy for the past five years.

A (Very) Short History of the Western Climate Initiative

Let’s backtrack a bit. In early 2007, a few months after he signed AB32 into law, Governor Schwarzenegger launched a successful outreach effort to other states in the Western US, to get them to commit to developing a regional GHG trading program. The idea was, on the one hand, to garner political support for cap-and-trade at a time where climate policy was on the rise in the US, and on the other hand, to ensure a broader market with less risk of leakage – emissions being displaced from the state with strict GHG controls to other states without such controls.
In February 2007, the Western Climate Initiative was born, supported by the Governors of Arizona, California, New Mexico, Oregon, and Washington – all Democratic states at the time except for California. Over the next two years, the WCI gained new members: the Premiers of British Columbia, Manitoba, Ontario, and Quebec joined the initiative, along with the Governors of Utah and Montana. Utah was a big score, not only because it was it brought in another jurisdiction with a Republican Governor, but also because Utah is host to some of the largest coal power plants of the region. Indeed, one of the key issues for the WCI was dealing with emissions from the power sector, as the electricity grid is fully integrated across the Western US (the so-called WECC region) and trying to reduce emissions from California without addressing out-of-state coal power plants was going to be challenging… sounds familiar, right?

From Outsider to Sole Partner

From that standpoint, Quebec was always a bit of an outsider. The province is not on the same regional grid as the rest of the WCI members, as it actually exports electricity into Northeastern US states. The Regional Greenhouse Gas Initiative (RGGI) would have been a better fit for them from that standpoint, but for Quebec’s unusual emission profile. Quebec’s power sector is 97 percent hydro, so joining a regional cap-and-trade program that covers only emissions from the power sector, like RGGI, would have been somewhat pointless. The WCI had ambitious plans to cover emissions from industry and the transportation sector, and already boasted several Canadian members, making it a logical home for Quebec’s desire to join a regional program.
Fast forward to 2013: all the other US states have now pulled out of the WCI, which only comprises four Canadian members outside of California: British Columbia (BC), Manitoba, Ontario and Quebec. Of these four, two have backed out from plans for a regional market until further notice: BC and Manitoba, leaving only Quebec and Ontario in the run for a linkage with California over the short run.

How will the linkage work?

Because Quebec and California have been working together for so long, their programs are ready to be integrated. The regulations are very similar and only contain provisions that are fully compatible. The Quebec program is structured just like the California cap-and-trade, with a comparable price ceiling and price floor, quarterly auctions, offset quotas and rules of engagement. The jurisdictions share the same backend systems: registry, auction platform and market monitor, managed through WCI, Inc.
Starting January 2014, California emitters will be able to use Quebec-issued allowances and offsets for compliance, and Quebec emitters California instruments. The jurisdictions will hold joint auctions, so that emitters from both jurisdictions will be able to purchase allowances from either program the same day, on the same platform. This will ensure allowances clear at the same price and that the market receives a consistent price signal.

Market Implications for California

A Short Market

Quebec is considerably smaller than California in terms of emissions: the entire province’s 2012 emissions topped at an estimated 78.8 Mt, with a forecasted growth to 84.8 Mt in 2020 (according to the Quebec Ministry for Sustainable Development, Environment, Wildlife and Parks). Quebec has taken on a target to reduce their emissions 20 percent below 1990 level, which was right around 84 Mt as well. The estimated gap between business-as-usual emissions and the target could be anywhere between 12 and 17.5 Mt in 2020 for the province, depending if you believe the Ministry forecast for aggressive emission growth or if you assume emissions will remain fairly flat, just like they have – on average – over the past 30 years.
The cap for covered emissions is 23 Mt in 2013 and 2014 – covering only emissions from the industry, since emissions from the power sector are virtually zero. The cap increases to 65 Mt in 2015, when fuels are covered under the cap, decreasing slowly to 55 Mt in 2020. To put things in context, California’s cap this year is 163 Mt, scheduled to rise to 394 Mt in 2015, which means Quebec adds about 15 percent volume to the California market.
The Quebec Ministry’s forecast points to a short market – if emissions rise as fast as planned, I estimate the emission-to-cap gap in Quebec in 2020 could be up to 20 Mt, once you account for the price containment reserve set aside. Offsets are allowed but the protocols approved by the Quebec government may only be located in Quebec or Canada, severely restricting the potential supply. This means Quebec will likely be a net buyer of California allowances, which will likely push prices higher.

New Regulatory Intricacies

The other noteworthy market impact for California is the need for market participants in California to assimilate the rules and price drivers of a different region, with a different language, currency, and political culture. (We can help with that – see our upcoming training courses and advisory services offering). For example, the auction reserve price will now be set as the highest of the reserve price in either jurisdiction, as determined by the exchange rate of the day of the auction. Little things, but which can make the difference between a winning and an invalid auction bid.

Next steps

The linkage is not quite done – but looking a hell of a lot better than it did even just a week ago. Two things need to happen:
1. The Governor needs to release his ‘findings’ that Quebec’s program satisfies the conditions laid out by the California legislature in June last year that the program requirements are “at least as stringent” as those of California, in particular for offsets. I expect those findings to be released in the coming week – and in any case before April 8.
2. The Air Resources Board will then be in a position to hear public comments (15-day comment period) on the amendments released last week and vote on the actual regulations. This will take place at a special Board hearing scheduled on April 19th in Sacramento.

Beyond Quebec

In the big picture, beyond the immediate market impacts for California, I see the linkage with Quebec is a fascinating proof of concept. California and Quebec are showing that it can be done – linking across borders on top of it. This first step potentially opens the door to other linkages down the road – Ontario in particular is still considering joining their WCI partners, which would make a big difference in terms of market dynamics. Down the road, the question of working more closely with RGGI might come up, especially now that RGGI states have committed to addressing their over-allocation problem. It would take some work on program design, but create a broader, more liquid market with more political sway at the federal level.