In the Arena is a broadcast and online series that interviews alumni of the Goldman School of Public Policy at UC Berkeley who have embraced careers in policy innovation and social entrepreneurship. Four Twenty Seven Founder and CEO Emilie Mazzacurati, an alumna of the school (MPP ’07), talked with host and fellow alumnus Jonathan Stein (MPP/JD ’13) about how Four Twenty Seven fulfills its mission to build climate resilience through social innovation by working closely with corporations and investors on climate risk and adaptation. Watch Emilie and Jonathan discuss climate data, social innovation and integrating climate risk to protect local communities on In The Arena — Finding Climate Solutions:
Cities and counties across the United States face a variety of challenges from climate variability and change as well as non-climate stressors that changing climate conditions threaten to exacerbate. Local jurisdictions that repair infrastructure, make land use decisions, and engage communities in a way that accounts for future change, can help make their cities more resilient. However, many cities and counties lack the capacity, resources, and funding to assess climate risks, integrate climate adaptation into existing plans, and implement adaptation actions in the face of competing or more immediate needs.
Even so, a growing number of local jurisdictions are engaging in voluntary commitments to mitigate and adapt to climate change. A wide range of available resources makes this possible, and climate legislation increasingly requires it, but both can also make implementing a cohesive, streamlined adaptation strategy difficult. Several federal agencies (FEMA and NOAA), state agencies (California Adaptation Planning Guide), international institutions (GIZ), and NGOs (National Wildlife Federation) have developed climate hazard or vulnerability assessment and/or adaptation planning guidance and methods. Industry and sector-specific tools and literature are also available from a multitude of sources. No single option can meet the diverse adaptation planning needs of cities and counties across the US, but the range of sources also presents local jurisdictions with the challenges of selecting a methodology, building climate literacy, and using their assessments to inform multiple goals, plans and projects.
In California, legislation exists that actively seeks to promote the integration of adaptation and resilience into local planning processes. Senate Bill No. 379 Land Use: general plan: safety element (Jackson) (SB 379) calls on local governments in California to incorporate adaptation and resilience strategies into the Safety Elements of their General Plans as well as their local hazard mitigation plans starting in 2017. Assembly Bill No. 2140 General plans: safety element (Hancock) enables local jurisdictions to adopt a local hazard mitigation plan as their safety element, facilitating integration of hazard mitigation into General Plans.
To support local governments’ implementation of SB 379, the Governor’s Office of Planning and Research recently issued draft guidelines for integrating climate considerations into Safety Elements. The draft guidelines build on the State’s Adaptation Planning Guide (2012) and emphasize the need for communities to adopt a longer-term perspective in preparing for climate risks. They also highlight the importance of identifying linkages and complementarity across different elements of the General Plan and other relevant plans. Thus, there is a need to unify and streamline efforts to boost resilience and integrate adaptation comprehensively into city and county planning in a way that leverages local capacity and resources, uses the best available science and data, and meets local needs as well as relevant requirements.
It is important to note that these requirements are in addition to local commitments and planning processes that each come with their own timelines and demands. Cities that commit to voluntary agreements, such as the Global Covenant of Mayors are required both to reduce greenhouse gas emissions and address the impacts of climate change by identifying climate hazards, assessing vulnerabilities, and developing adaptation plans. Cities may have adopted several plans that integrate or overlap with climate planning, such as Climate Action Plans, Adaptation Plans, Resilience Strategies, Transit Oriented Development Strategies and more. Adaptation has a crosscutting role to play across all these forms of city planning, so comprehensive integration of risk and vulnerability assessment and adaptation action is essential.
Towards a Solution
In support of implementation of integrated climate adaptation planning, Four Twenty Seven has developed a streamlined process to support local governments in their efforts to integrate climate risks into key planning efforts, such as local hazard mitigation plans, general plans, and climate action plans. Through our work for seven cities in Alameda County, on behalf of the County waste authority, StopWaste, we designed an assessment process and report to help cities meet the requirements of SB 379. For each city, this work responds to these requirements and others by providing a climate hazard exposure analysis and proposing a set of adaptation options to help each city plan for future conditions.
The assessment and report are designed to be applicable to multiple cities and useful for multiple planning processes. The objective is to develop one hazard assessment and set of adaptation actions that can fulfill or inform multiple city demands and decision making processes. In this case, the hazard assessment focused on asset-specific exposure, however, the methodology could be expanded to include the other components of vulnerability – adaptive capacity and sensitivity – in order to meet the needs of other jurisdictions and planning processes while promoting an accessible and streamlined approach to climate hazard assessment and adaptation planning. The second blogpost in this series on local adaptation planning will discuss climate hazard assessment in greater detail, and the third blog in the series will focus on adaptation planning.
California is a leader on climate resilience and adaptation efforts in the U.S. Yet translating adaptation policies into clear budget priorities can be a challenge. This Policy Brief provides a detailed analysis of the California budget for FY 2016-2017 with regard to adaptation and resilience spending, with an eye to lessons learned for other states and opportunities for improvement and clarification for future budgets.
California’s adaptation policy builds on a growing body of legislation – namely, SB246, AB1482, SB379, and Executive Order B-30-15 highlight California’s commitment to adaptation and resilience, as do numerous state and local programs. We found that these priorities are reflected in the 2016-2017 State budget, but somewhat disjointedly.
Governor Brown’s proposed budget, which the legislature passed on July 15, does not allocate specific amounts to programs labeled as adaptation- and resilience-focused. Rather, it supports programs related to drought resiliency, infrastructure upgrades, climate change, and other issues. Therefore, tracking resilience-specific finance is difficult; to overcome this challenge, we analyzed the 2016-2017 budget by looking at both specific sections of the budget and policies that relate to climate hazards. Within certain sections, we were able to compare allocations that support climate resilience to the total allocations for sector initiatives. Policies related to hazards include those designed to protect vulnerable populations and the overall strength of the state to respond to disasters.
In our view, California’s latest budget does not yet adequately address the state’s adaptation challenges, nor does it fully reflect the state’s priorities. However, with the final round of legislation passing before the close of the legislative year on August 31, 2016, the State set itself up for success by addressing gaps in allocations, prioritizing environmental justice and setting the stage to clarify cross-departmental standards for addressing climate change. It is now essential that the state move forward with the implementation of these initiatives in a clear, communicative way, in order to ensure that state funds engender climate resilience.
President Obama announced on July 16 new federal resources, grants and tools specifically intended to help local communities prepare for climate impacts. Citing direct threats to US infrastructure outlined by the White House Task Force on Climate Preparedness and Resilience, the series of actions will help Native American Tribes, rural communities and cities across the US assess vulnerabilities, deal with current impacts such as drought and develop strategies and plans to increase resilience in the future. The funding will also support development of three-dimensional mapping of the US to improve our ability to mitigate floods and erosion.
This unprecedented support for resilience building provides valuable opportunities to pilot new strategies and technologies as well as to share best practices across state lines. Adaptation strategies must be informed by local conditions and site-specific data in order to be successfully implemented – one of the reasons this new federal funding is so critical.
Wednesday’s meeting marked the last of the 26-person White House Task Force on Climate Preparedness and Resilience, which will submit their final recommendations to the President this fall. The task force is made up of mayors, governors, county and Tribal officials.
Focused Funding from Multiple Sources
This week’s announcement follows the Administration’s June launch of a $1 billion investment fund for climate resilience. Any state, city or tribe that experienced a federally declared major disaster in 2011, 2012 or 2013 – approximately 200 of which hit the US over that three year period – is eligible to compete for the resilience funds. New details for the competition outline two distinct phases over the year-long competition beginning with risk assessment and planning, followed by design and implementation. Not all communities who are awarded funding for the first phase will continue to receive support for implementation efforts. Instead, phase two funding will be limited to those proposals that show the most potential for success and replicability across the US – a big incentive to inspire creative proposals that seek to partner across sectors.
Other new funding announced this week includes $10 million for Federal-Tribal Climate Resilience Partnership and Technical Assistance Program focused on preparation through the delivery of adaptation training to Tribes nationwide. Rural communities that are already struggling with drought, especially in the West Coast, will also receive additional funding to improve current coping mechanisms. The Obama administration also committed an additional $236.3 million to rural communities in eight states to support efforts to improve rural electric infrastructure to both increase economic competitiveness in these areas and build resilience – a huge boon for energy assurance planning which is key to successful adaptation. Additionally, $1.5 million of competitive funding will be available to states and Tribes to improve coastal management programs by taking climate impacts into account.
New Tools, Guidance and Pilot Projects
Obama’s pledge of new funding is coupled with strategic investment in innovative mapping data and tools, new guidance for Hazard Mitigation Planning and the launch of two preparedness pilot projects in the City of Houston and the State of Colorado.
The 3-D Elevation Program Partnership will advance 3-dimensional mapping data of the US through collaboration between the public, private and academic sectors as well as local communities. These data and tools will be designed to enhance a community’s ability to predict and respond to floods, coastal erosion and storm surge impacts and to improve water resource planning and identification of landslide hazards – all essential aspects of adaptation planning and local resilience. New, more sophisticated 3-D maps will also help state governments comply with new guidance from FEMA requiring consideration of climate variability within State Hazard Mitigation Plans.
Key Federal agencies including NASA, the Energy Department, Department of Defense, Department of the Interior, Department of Agriculture and the U.S. Army Corps of Engineers will all play a role in the “Preparedness Pilots” to be launched in both the State of Colorado and the City of Houston. The goal of the pilots are to enable each community to assess and prepare for region-specific climate vulnerabilities and interdependencies as a way to demonstrate new strategies and programs and provide models for other areas nationwide. These cross-agency partnerships will also help to shed light communication gaps and needs between the agencies to improve their ability to continue partnering going forward.
Ahead of the Curve in the Golden State
The President’s suite of tools and resources will undoubtedly enhance regional and national capacity to assess and plan for climate vulnerabilities. In California, home of the nation’s only multi-sector carbon cap and trade program, state leaders are already starting to step up to this challenge by assessing governance structures and needs for climate impacts above and beyond greenhouse gas mitigation.
In “Governing California Through Climate Change” a recent report released by the State’s Little Hoover Commission, the author’s outline current weaknesses and gaps within California’s governance infrastructure as it relates to adaptation planning and implementation of resilience building strategies. The Commission ultimately asks the State to take on the same role and responsibilities in climate adaptation and risk assessment that it has for managing the state’s greenhouse gas emissions – a big ask but one that has been anticipated by many at both the state and local levels.
The report was informed in part by three public hearings held by the Commission beginning last August 2013 where local and state officials, private sector representatives and adaptation experts shared their experience in local resilience building efforts as well as their recommendations regarding the role of the state.
These varied testimonies pointed to the alarming fact that there is currently no clear, state-level authority or structure to develop statewide adaptation policy. The lack of a consistent and authoritative source of data and climate information at the state level was also cited as a major concern. This lack of data coordination and consensus is coupled with a state governance structure that, by nature, isolates accountability for specific climate impacts in different departments, agencies and budgets.
Because there are numerous state agencies whose jurisdictions touch on aspects of resilience building – such as the Coastal Commission – responsibility to address the multiple risks posed by climate impacts is at best, widely distributed among agencies and, at worst siloed within inflexible bureaucracies of state government.
Key report recommendations include:
- Establish a new state entity, or enhance the capacity of an existing entity, to establish and share the best-available state science and risk assessment procedures for anticipated climate impacts.
- Expand the focus of the California Strategic Growth Council to fund non-conflicting adaptation and mitigation efforts in cities, counties and regions.
Looking Ahead – Who’s on Board?
Like the President’s nationwide commitment to resilience, the Commission’s report acknowledges the importance and necessity of local knowledge and data to inform a successful statewide adaptation strategy. Climate change will affect each of California’s cities, counties and regions based on location specific vulnerabilities – therefore, any statewide strategy, according to the Commission, must be informed by local risk assessments.
The President’s announcements and new, targeted funding sources are a direct response to inaction from the Congress on critical climate issues – as such, enthusiastic opposition from Republican leaders is anticipated. Similarly, in California, efforts to streamline and accelerate vulnerability assessments and adaptation planning will likely be met with resistance from some local communities fearful of potential regulatory and budget implications at both the state and local level.
However this unprecedented support for resilience building provides valuable opportunities to pilot new strategies and technologies as well as to share best practices across state lines. Both of these efforts also highlight the importance of engaging the private sector to enhance the development of new tools and strategies and to better understand our local economic vulnerabilities. Unlike greenhouse gas mitigation, adaptation strategies must be informed by local conditions and site-specific data in order to be successfully implemented – one of the reasons this new federal funding is so critical.
Ultimately, states, communities and private sector companies that have invested in understanding their specific climate risks and vulnerabilities will be well positioned to capitalize on these new opportunities. Climate impacts are already affecting communities nationwide – these changes present huge challenges and require immediate response to avoid catastrophic impacts. This new federal level support presents multiple opportunities to not only increase climate and economic resilience, but to better understand how we can work across sectors and communities to capitalize on the opportunities that our changing climate presents. It’s clear that anyone not yet ready to take a realistic look at their own climate risk will miss out on many near term opportunities and, ultimately, end up suffering much larger economic and social costs in the long term.
Images courtesy of USGS and Little Hoover Commission.
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.
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.
Governor Brown delivered this week the State of the State address to the California legislature, in a speech that included several references to climate change and California’s climate policy. The drought is naturally on everybody’s mind in California, as the state experienced its driest year on record (and possibly since 1580, according to scientists). The Governor proudly mentioned AB32 and the array of renewable energy and energy efficiency efforts across the state. However, he said, “in terms of greenhouse gases, our biggest challenge remains the amount of gasoline Californians use. Each year, our motor vehicles use more than 14 billion gallons of gasoline to travel over 330 billion miles. To put those numbers in perspective, the sun is 93 million miles away.”
The State of the State comes on the heel of the proposed budget 2014-2015, released earlier this month, which included the much-awaited proposal for disposing of auction proceeds. Anxiety ran high late last year at the thought that the Governor might withhold those funds again. Instead, his proposed budget included a detailed and thoughtful allocation to an array of new and existing state programs that reduce greenhouse gas (GHG) emissions and promote other desired goals, such as increased water efficiency, higher recycling rates and lower risk of wildfires.
We take a detailed look at the Governor’s policy and budgetary priorities for 2014-2015 and discuss market implications for California cap-and-trade.
The governor plans for $850 million dollars of revenues for the GHG Reduction Fund in 2014-2015, a conservative estimate in our view. Auctions so far have brought in $532 million, of which $500 million was loaned to the General Fund last year. We forecast $1300-$1500 of auction revenues in 2014-2015, a large increase compared to revenues in 2013-2014 due to the inclusion of fuels under the cap starting in 2015. The $850 million also includes the repayment of $100 million from the funds borrowed last year, with the rest to be reimbursed “over the next few years”.
The investments fall in three broad categories (see Figure 1 below):
- Sustainable Communities and Clean Transportation (blue)
- Energy Efficiency and Clean Energy (red and grey)
- Natural Resources and Water Diversion (purple and grey)
Figure 1. Proposed Cap-and-Trade Expenditure Plan (Dollars in Millions)
Data source: Governor’s Proposed 2014-2015 Budget.
Sustainable Communities and Clean Transportation
The first category gets the lion’s share, with 71 percent of the monies allocated to three overarching programs: $300 million (35 percent) for “rail modernization”, $200 million (24 percent) for low carbon transportation and $100 million (12 percent) for “sustainable communities.” Rail modernization is a euphemism for high-speed rail, possibly one of the most controversial items in the entire budget – see below. The other two are much needed funding for existing and developing initiatives: the implementation of SB 375, the deployment of zero-emission vehicles (ZEV), for which the Governor has set a target of 1.5 million vehicles by 2025, and the transition to low-carbon freight.
Energy Efficiency and Clean Energy
The Energy Efficiency and Clean Energy bucket gets a much smaller share, 16 percent of the auction proceeds in total, which stands to reason given that so many programs and different sources of funding already promote energy efficiency and clean energy. The funds in this category are used for targeted programs: assistance for efficiency upgrades and weatherization of low-income dwellings, state green buildings, and projects focused on reducing methane and nitrous oxide emissions in the agricultural sector.
Water Action Plan
Water-related projects straddle the energy efficiency and natural resources buckets for a total of $50 million, dedicated to water efficiency projects that reduce GHG emissions and to wetlands and watershed restoration. These projects have significant co-benefits: water supply is always an issue in California, but is even more so now because of the drought and the expected shifts in temperature and precipitation patterns that climate change will bring to the Golden State. Wetland restoration is also an important measure to prevent catastrophic flooding that may become more frequent as the sea level rise. Both projects are part of the wider state strategy for water resources detailed in the Water Action Plan.
Natural Resources and Waste Prevention
Another $50 million goes to fire prevention, another project type that helps curb GHG while improving resiliency to drought and climate change. Budget cuts at the Federal and state level over the past years have limited the ability of firefighters and foresters to conduct effective fire prevention programs, so using auction proceeds to support forest health seems is a wise move. Urban forestry also gets dual benefits since in addition to sequestering carbon, trees help shade streets, regulate temperature, and avoid urban heat island effect – all of which are particularly useful as heat waves are due to become more frequent, hotter and longer in California.
Last but not least, waste diversion is $30 million to expand infrastructure and develop clean composting technology. As landfills are regulated and not eligible for offset credits in California, this provides an economic incentive to balance out the regulation and support technological innovation in the field.
An Integrated Climate Strategy
All in all, projects with direct climate adaptation co-benefits total $100 million and promote actions aligned with the top priorities in California’s draft update climate adaptation plan, Safeguarding California, released in December 2013.
One missed opportunity in this iteration of the budget is funding to develop localized smart grids. These grids can help bring small renewable projects online, and promote resiliency of the electricity system in case of extreme weather events, wildfire or flooding that can affect transmission lines or large power plants. Those projects typically reduce emissions and would satisfy the requirement that projects funded by auction proceeds contribute directly to emission reductions, and would also help prevent one of the most disruptive and immediate impacts of climate change for people and businesses alike.
Investing in Disadvantaged Communities
SB 535, passed in the summer 2012, required that at least 10 percent of the proceeds received by the state be invested within the most impacted and disadvantaged communities and at least 25 percent of the proceeds be invested to benefit these communities. The Investment Plan developed a methodology to identify ‘disadvantaged communities’ based on an array of indicators reflecting “burden of pollution,” including exposure and environmental effects, and “population characteristics, which includes socioeconomic factors. The map below maps the top 10% highest scoring (most disadvantaged) zip codes.
Figure 2. Mapping Disadvantaged Communities in California
Source: California Final Investment Plan, April 2013
Many of the proposed investments have a clause to ensure disadvantaged communities receive this funding in priority; and the budget proposal estimates that a minimum of $225 (26 percent) will go to those communities.
Should Auction Proceeds Fund the High-Speed Rail Train?
The high-speed train has garnered a lot of political and media attention – it is a stated priority of the Governor, receives 30 percent of the proposed allocation, and has been subject of a heated debate for decades in California.
Supporters of the project, starting with the Governor, argue that it is an overdue infrastructure that will help reduce emissions in California and steer the state towards low-carbon economy. Critics raise all kind of issues with the plans, notably legal and budgetary – only a small amount of the total funds are secured so far, which could endanger the viability of the entire project.
Two criticisms are directly relevant to the use of auction proceeds and the carbon market at large. First, according to an analysis by the Legislative Analyst Office (LAO), the high-speed train’s emission reduction benefits will only be felt in the very long-run – mostly after 2020 – while the construction itself will generate GHG emissions, yielding a net increase in emissions over the 2014-2020 timeframe. Second, the LAO and environmentalists all argue the same investments would generate more emission reductions faster if invested in local transit improvements, which also bring a number of social and environmental co-benefits to communities with reduced local pollution, better health outcomes and better access to job opportunities for low income households.
The takeaway from this discussion is that the flagship investment proposal for auction proceeds is vulnerable to legal challenges, on the ground that it does not help achieve AB32’s primary goal of reducing emissions by 2020, and vulnerable politically, since a cost-benefit analysis might show that other investment options could generate more emission reductions at a much lower cost per ton. We expect the issue will be up for debate in the Legislature over the coming months, and it is uncertain whether the Governor will be able to keep auction proceeds as a source of funding for the high speed train.
In its update on the status of scoping plan measures from 2011, the Air Resources Board provided estimates of emission reductions measures included in the Investment Plan.
ARB estimated the high speed train would reduce emissions by 1 million metric ton CO2 (Mt) by 2020. Goods movement and medium/heavy duty vehicles, which overlap with the “low carbon transportation” investment category, were expected to yield 0.2 Mt and 0.9 Mt respectively, albeit with a high uncertainty since most measures were not fully developed at the time. Solar roods and solar water heating together would lower emissions by 1.2 Mt.
These estimates are to be compared with the emission reductions expected from leading measures, such as 15 Mt from LCFS, 30 Mt from Pavley standards or 12 Mt from energy efficiency programs.Thus from a market standpoint, none of these measures taken individually are market movers. However, over the long run, these investments contribute to the downward trend in carbon emissions for the state, and the likelihood that prices will stay near the floor on the carbon market for the coming years.
As auction revenues rise with the inclusion of fuels under the cap in 2015, the allocation of auction proceeds will gain increasing importance. The question of whether the high speed train qualifies as an eligible use of auction proceeds becomes all the more crucial because it will set a precedent for future investment plans. If it is allowed, then a larger portion of revenues will likely be directed towards the train in the future, since billions more are needed to complete the construction. If not, the government will have to be more creative on how to use the monies in a cost-efficient manner, which could bring about more innovation and also more support for projects with climate adaptation co-benefits.
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.
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
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.
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
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
A 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.
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)
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
Quebec’s first auction took place on Tuesday, December 3rd and results were published on Friday, December 6th. The auction regulations are largely similar to California’s, and this was the sole auction where only Quebec allowances were offered for sale, to the benefit of Canadian-based entities only. Starting in 2014, California and Quebec will hold joint auctions where allowances from both jurisdictions will be offered for sale.
Quebec’s December auction saw 1 Mt of V13 allowances sold, 34 percent of the 2.97 Mt offered for sale, at the reserve price of CAN $10.75 (US $10.10). The take up for V16 allowances was even lower, with 1.7 Mt sold, only 27 percent of the total 6.32 Mt offered for sale. The low interest in Quebec V13 allowances came as a surprise as many participants saw a potential upside price risk due to the uncertainty surrounding any first auction – which didn’t materialize. We discuss below potential explanations for the low participation.
The low take up rate of V16 allowances, on the other hand, was to be expected, since the volume offered was large compared to current year emissions. V16 allowances offered for sale amounted to over 25% of covered emissions in 2013, and therefore were unlikely to be absorbed by current participants.
The Quebec market has been ramping up slowly overall, with over-the-counter transactions few and far between. This is to be expected with a small market, only a few large players and a generous free allocation. Linking to the California market is therefore an important step for Quebec, which will open access to a larger, more liquid secondary market and more anonymity in the primary and secondary market.
Industrial emitters dominate
In Quebec, 95 percent of the electricity is generated from hydropower, so that the power sector has virtually no emissions, leaving almost exclusively industrial emitters in the first compliance period. The industrial sector emitted a total of 23.2 Mt in 2011, with aluminum companies making up a quarter of the sector’s emissions, followed by pulp & paper, refining and cement according to data provided by our partners in Quebec, EcoRessources (see Figure 1.)
Figure 1. Industrial Emissions in Quebec
The program covers 91 emitters in total, but many of these facilities are very small emitters, leaving only a dozen covered emitters likely to participate actively in the traded market. Just like California, the largest emitting sector is the transportation sector (35 Mt) and natural gas (7 Mt), and the bulk of the emission reduction effort will really start in the second compliance period, in 2015.
While Quebec has a more aggressive emission reduction target than California, of 20 percent below 1990 levels by 2020, EcoRessources forecasts the first compliance period will also be overallocated. The Quebec allocation formula is somewhat more generous than California’s, and it is quite possible that some industrial emitters have more permits in hand already than they need to cover their 2013 emissions.
Some surprising no-show
Nineteen bidders participated in the auction – Figure 2 provides a breakdown of the number of potential bidders by sector. The vast majority of bidders came from the industrial sector, mostly refineries, metals (steel) and cement. Surprisingly, aluminum companies did not participate – they constitute the largest emitting sector in QC, and their absence likely contributed to the low take-up rate of allowances. Even in the cement sector, only two of the largest four cement plants joined the auction. All three large refineries participated.
It is unclear whether aluminum facilities did not join the auction because they didn’t need the allowances or because they preferred to wait for the California auction. One could speculate that large emitters would rather wait for the joint auction, where their demand is less likely to drive prices up because it will be lumped together with that of many other large emitters from California.
Another absence worth noting is that of fuel distributors – none of the large gasoline and natural gas distributors participated in the auction, indicating that these entities have not started banking yet for the second compliance period. And finally, no financial player joined the auction, not even the Canadian bank that has bid in California auctions in the past.
The absence of many large emitters, fuel distributors and financial players altogether explains the low take up rate of V13 and V16 allowances.
A Question of Timing
It’s also worth noting that Quebec does not have a partial annual compliance requirement. California requires its emitters to surrender 30 percent of the previous year’s emissions on an annual basis, and emitters are left to make up the difference at the end of the compliance period. In the absence of such an annual obligation, Quebec emitters are not required to surrender any allowance until November 2015, which probably also explains the lack of interest in this week’s auction. We expect to see more interest from Quebec emitters in the joint auctions starting next year.
What to expect from the joint auctions?
The next auction will likely take place in May 2014. The February auction should be simultaneous but not on the same platform – see Table 1. for the full 2014 auction schedule.
Table 1. Auction Schedule for 2014
Source: California Air Resources Board.
Note that “Reserve Sale Events” date refer to the sale of Price Containment Reserve Allowances, which will be offered for sale at a price ranging from US $42-$53, and therefore are not expected to see any buyers.
Auctions going forward will see CA and QC allowances offered for sale jointly, on the same auction platform. The reserve price will be US$11.34 (CAN $12.09) in 2014 for both jurisdictions. (If Quebec was going it alone, the 2014 reserve would be around CAN $11.38 (US $10.67) for QC allowances, but the regulation stipulates that the common reserve price will be set on the highest of the two reserve price based on the exchange rate at that time, which means the CA reserve price will set the floor for both jurisdictions). Allowances from either jurisdictions will be fully fungible starting January 1st, 2014 and can be indiscriminately traded, banked, and retired for compliance in either jurisdiction.
Auction 5 results showed continued interest and participation from natural buyers, which resulted in a higher than expected clearing price for V13 allowances. The results indicate healthy market participation. We expect price on the secondary market will remain in the $11-$12 range through the end of the year, with increased market volumes in December for the close of the year.
Vintage 13 allowances sold for $11.48 a ton, 74 cents (6 percent) below the August auction clearing price of $12.22, and almost 20 cents above secondary market prices. The clearing price and the subscription rate (see Figure 1) were a little higher than most market participants and analysts (including us) expected. Vintage 16 allowances sold for $11.10 a ton, the exact same price as the August auction and 15 cents below closing prices on ICE the day before the auction. Both auctions were fully subscribed.
These results indicate not only that participants are stockpiling allowances to prepare for the long haul, but also that a number of large emitters are still buying for their 2013-2014 compliance needs.
Who Were the Bidders?
As expected, the number of participants was slightly lower than at previous auctions. Demand from utilities and independent power generator remained strong (see Figure 2.). Auction 5 also saw the first participation from a voluntary buyers looking to purchase allowances to use as voluntary offsets rather than for compliance.
Figure 1. Bidders at California auctions, 2012-2013
Data source: California Air Resources Board
The auction brought $137 million in revenues to the State of California. Investor-owned utilities raised $150 million on behalf of ratepayers, and publicly-owned utilities sold $10 million worth of allowances. The use of auction revenues will be determined by the Auction Proceeds Investment Plan, which is being drafted by the Air Resources Board.