Supporting Climate Resilience in the Health Care Sector

WH_OSTP_400x400On April 7, 2015 the Obama Administration announced a series of actions and partnerships to help analyze and translate the linkages between climate change and public health impacts for policy makers and citizens alike. The actions build on the Climate Data Initiative, launched in 2014 and includes the release of 150 health related data-sets on “Health Resilience” adding to the existing 500 climate-related data sets now publicly accessible.

Four Twenty Seven is thrilled to take part in this exciting effort. In support of the Climate Data Initiative, Four Twenty Seven will leverage its proprietary model and risk assessment methodology to provide a climate risk assessment for 100 of the country’s health care facilities with large patient populations.

CoverPrimaryCare_Report_Dec2014Building on the vulnerability assessment framework developed as part of the Obama Administration’s Climate Resilience Toolkit, Four Twenty Seven will screen critical health facilities and deliver an interactive, publicly accessible online dashboard that enables users to identify risk hotspots, key drivers of risk, and the types of impacts faced by specific hospitals.

This analysis and dashboard will support decision-making by enabling policy makers to visualize at-risk assets, prioritize resources, and communicate the urgency of boosting climate resilience in health care facilities.

Public-Private Partnerships

This type of public private partnership is key to the Obama Administration’s efforts to leverage big data and technological innovation to address pressing public health issues that are exacerbated by climate impacts. The interactive tool that Four Twenty Seven develops through this partnership will inform decision-makers across sectors and will be publicly accessible creating new opportunities for communities nationwide to engage in this critical discussion.

Other private sector initiatives include efforts from Microsoft, Google, Esri (ArcGIS), EMC Technology and Harvard University, with the shared objective to leverage the new datasets into effective predicting technology and forecasting models.

Through leadership at the local, state and federal level, public health officials and experts have been working to identify the linkages between climate impacts and public health and, importantly, to share best practices and lessons learned to enable implementation of “win-win” solutions that simultaneously address climate change and improve health outcomes.

Actions from the Administration beyond public private partnerships include the development of new tools and guidance, cross-sector workshops to convene key stakeholders, the integration of climate considerations into departmental policies, and training of health care professionals.

Relevant Research and Guidance

Several important reports were also released on this occasion, including:

    • A draft assessment of the impacts of climate change on public health from the US Global Research Change Program
    • A new report from the Public Health Institute (PHI) titled Climate Change, Health and Equity: Opportunities for Action which provides a conceptual framework outlining how these issues are linked and provides recommended policy actions to advance solutions.
    • Adaptation in Action, a report from the Center for Disease Control and Prevention (CDC) that outlines specific successes in a number of cities and regions that have taken action to reduce negative health outcomes from climate change.  In addition, the CDC plans to release a Health Care Facilities Toolkit to promote best practices in resilient health care infrastructure.
Impacts of Climate Change on Human Health. Source: CDC
Impacts of Climate Change on Human Health. Source: CDC
  • At the local level, the City of San Francisco’s Department of Public Health just released its first Climate and Health Profile which highlights the direct health effects of local climate impacts such as reduced air quality and rising temperatures and identifies areas of city that will be disproportionately impacted.

Four Twenty Seven is honored for the opportunity to leverage its models and climate risk assessment methodology to contribute to a greater understanding of vulnerability and resilience in the health care sector and to help bolster socio-economic resilience in the United States.

 

 

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.

Survey

  • 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.

Five Ways to Improve your Climate Risk Reporting

CeresS&P500DisclosureRate
Climate Disclosure By S&P 500 Companies: 10-Ks Filed 2009-2013. Source: Ceres 2014.

More companies report climate risks, but few do it well

According to Ceres, just shy of 60 percent of S&P 500 companies report climate risks in their financial disclosures (10-K), but the quality of disclosures is going down over time. “Most S&P 500 climate disclosures in 10-Ks are very brief, provide little discussion of material issues, and do not quantify impacts or risks” writes Ceres in Cool Response: the SEC & Corporate Climate Change Reporting. Companies typically include no more than “one short paragraph or a couple of lines focused on climate-related risks or opportunities.”

Uncertainty or Complacency?

three wise monkeysWhy are companies so shy in disclosing climate risks? Part of the answer is that the uncertainty around climate change hazards – their magnitude, timeliness or location – make it difficult for companies to assess whether the risks qualify as “material”. More often than not, however, the timid reporting has more to do with the lack of a systematic risk analysis, backed by an established methodology and solid benchmarks. Politics and concerns over liability also play a role in a hushed reporting tone, whereby companies may think they are better off avoiding the topic altogether rather than providing partial and potentially inaccurate information.

Thinking Beyond Carbon Regulatory Risk

The potential for quality climate risk disclosure is often much higher in CDP reports, which effectively prods for detailed answers. In its Global 500 Climate Change 2013 report, CDP points to “a seismic shift in corporate awareness of the need to assess physical risk from climate change and to build resilience.”
Yet, the same report highlights a common shortfall among reporters: “Companies tend to focus on tangible risks in areas such as carbon taxes or energy prices, whereas the benefits from climate related opportunities are often less tangible, such as changing consumer behavior. (…) This suggests that businesses may be missing some significant risks and opportunities because valuation methods are unavailable.”

Most risks and opportunities reported to CDP are related to carbon regulations.
Most risks and opportunities reported to CDP are related to carbon regulations. Source: CDP 2013

Five Ways to Improve your Climate Risk Reporting

Accurately identifying risks and opportunities and developing a strategic adaptation plan are crucial to a company’s long term’s profitability. How can you better identify climate risks & opportunities, reduce your vulnerability, and improve your reporting score?
Focus on the Big Ticket Items: for an initial risk screening, you’re better off focusing on your assets and facilities with the highest embedded value. While imperfect, this will help you identify low-hanging fruits and gain support from your management for a more comprehensive analysis.
Be Timely: climate change is not all about floods, drought or hurricanes. When looking at assets with a long life span, you should consider gradual changes in temperature and precipitation, which could drive utility costs up, as well as sea-level rise and the increased likelihood of storm surge.
Think global: an effective analysis will identify and benchmark risks and opportunities across your entire value chain, not just your own operations. Examine your suppliers and your extended supply chain network, your distributors and your customers. The main source of risk could be in your market or in one of the raw materials you depend on.
Act local: your adaptation response needs to be crafted individually for each location. You may need to consider traditional risk management tools, such as insurance, along with non-traditional methods geared specifically to the local circumstances of your facility, supplier or distributor.
Be a Team Player: climate change is not a problem that can be solved alone. A robust adaptation strategy will require meaningful engagement with local stakeholders and partnerships with public agencies.

Get an early start on the 2015 reporting season!

Our new climate risk Forecasting and Adaptation Strategic Tool (FAST) is a rapid and effective way to screen your value chain and reduce vulnerability to climate change risk. Get a customized report, with maps and graphics ready for use in your CDP and DJSI reports. Present compelling visuals and cost estimates to your company’s leadership team and start pro-actively managing your climate risk exposure.

Special offer: pre-order your climate risk analysis with our Forecasting & Adaptation Strategic Tool by December 31st, 2014 and save 40%!

When Global Warming Brings Snow, Sleet, and Ice.

The recent winter weather that buried Buffalo, NY under more than 5 feet of snow and ground life to a halt should attract the attention of US businesses leaders across the country. Although Buffalo is prone to heavy snowfalls, the long-term outlook for more frequent and severe snowstorms for business is not good. Extreme winter storms in the US have been increasing in frequency and severity over the past 30 years (graph “US winter storm loss trends, 1980-2011”: http://www.iii.org/fact-statistic/catastrophes-us), with average annual associated financial losses nearly doubling over that time.

Heavy snowfalls can halt local business activity and cause extensive physical damage. Establishments from businesses to schools and government buildings were barricaded in and could not open their doors. Driving bans were even imposed on several areas. While damage was widespread as the snow was caving in windows, doors, and roofs, some business, like Schmitt’s Collision and Glass and VSP Marketing Graphics Group, had complete cave-ins and equipment losses approaching $1 million. Even the Bills-Jets NFL game was moved to Detroit, losing the Bills both home advantage and ticket sales revenue.

t1larg.buffalo.snow_.gi_-630x354

An extreme snowfall can also initiate indirect economic losses and cascade into supply chain disruptions. One hour down the blocked NY State Throughway, Rochester companies have had difficulty receiving shipments from normal supply routes and have scrambled to find replacement goods with varying degrees of success. Buffalo is home to major distributors for businesses such as the area’s major supermarket chain Wegmans. The snowfall has impacted the heavily used trucking route that runs through Buffalo from areas as distant as Wisconsin. Trucking companies are also sending out refrigerated trailers earlier than normal, at an additional cost, to prevent food from freezing because of the extreme cold.

Weather forecasts predict the snowfall to be followed by warmer weather and rain, which could lead to severe flooding from snow melt. Flood warnings have been issued as light rain and temperatures in the 50s and 60s threaten to flood areas that have never been at risk of flood before. Governor Cuomo commented on the new dangers arising from the snow melt and recommended people to leave at-risk homes early:

“Err on the side of caution…Flooding, in my opinion, is worse than dealing with snow,” Cuomo said. “It’s not water. It’s a toxic brew.”

Although it seems counter-intuitive, these winter storms are not getting worse despite global warming, but rather because of it. The complexity of this result illustrates how confusing climate change signals can be and the importance of creating accurate awareness. Scientists point to a weakening of the jet stream, the Earth’s halo of fast moving air, caused by warming in the arctic outpacing that of the rest of the world. A slower jetstream tends to meander and is more easily pushed off track, bringing warm air further north and cold air further south as its normally straight flow forms waves.

vortex1114Experts trace the recent jet stream wanderings to Typhoon Nuri. The typhoon pushed the jet stream off course and north with a large body of warm air as it moved into the northern Pacific. As the air current bulged northward, arctic air downstream had nowhere to go but south, pushing the jet stream ahead of it over the continental US. Events like this year’s “Arctic Blast” and last year’s famous “Polar Vortex” will be more easily triggered by climate change-weakened jet streams. This chain of events, along with a Lake Erie’s warming by long-term climatic changes, caused the flow of very cold air to pick up additional moisture and dump it on Buffalo as “lake effect” snow. Energy from Typhoon Nuri then proceeded to be carried down the jet stream to Buffalo, resulting in the warming spell that causes flooding. (See Al Jazeera’s excellent in-depth explanation of this phenomenon).

As the climate continues to change, events like these are predicted to become regular occurrences and not outlying record-setting events. Businesses need to ready themselves for a future of 6-foot snowfalls and be better prepared to act quickly.

Image: (c) Munich Re, Getty Images, and AccuWeather.com

Corporate Climate Risk Management: Rising to the Challenge

This article was originally published on the Huffington Post on October 16, 2014. Click here to read the whole piece.

The sky was grey, but the air still warm from the late Indian summer. It was October 25, 2012; I was in New York City. I had quit my corporate job the week before, and was visiting friends and business connections in an effort to think through my next venture. After five years of working on climate policy and carbon markets, I was determined to start a new company focused on climate adaptation — but I was uncertain of the specific market needs, or whether climate risk management was already on the radar for businesses in the U.S.

On October 26, it became clear that the East Coast was about to get hit by the biggest storm to ever make landfall, and I just had time to catch the last train on the Northeast Corridor before all transportation networks shut down. I spent a couple of windy, rainy days hunkered down with relatives in Northern Virginia, watching on TV the incredible destruction brought about by Hurricane Sandy in New York and New Jersey.

Aside from the tragedy of human losses, what struck me most was the chaos that extreme weather event could bring to one of the wealthiest, most organized, most resourceful cities in the world — and some of its most powerful businesses. After the shock of seeing Manhattan flooded and powerless for days on end, tough questions followed: why was Goldman Sachs’ building so well protected, when the New York Stock Exchange had to shut down for two days? How would downtown neighborhoods recover when the local businesses that made up the fabric of the community were flooded, many of which at risk of never re-opening their doors?

Out of this darkness also came stories of resilience and solidarity — the cafe that put out outlets for neighbors to charge cell phones off their backup generator, the restaurant that served free hot food to its usual patrons who had neither heat nor water in their high-rise residence.

These stories provided the genesis for Four Twenty Seven, the company I founded a few months later. My initial goal was to deliver quantitative climate risk analysis to help businesses understand the costs that the physical impacts of climate change will have on their operations — and take action.

Assessing climate risk is a major headache for most companies — climate change impacts are complex, uncertain, and evolving. The model my company has developed takes specific company data — the materials, resources and facilities in its global operations — and maps them to the relevant changes to natural resources stresses and extreme weather events as predicted by global climate models. This helps our clients identify climate risk hotspots, reduce vulnerability and strengthen their value chain.

Models don’t provide final answers, but they help start the conversation on potential risks. And indeed, risk assessments are just the beginning of the conversation. We quickly found out that the real question is not how much climate change might cost Wall Street, but how large corporations can prepare and protect their assets in a way that benefits the communities where they operate and to whom they depend on for their own success.

Of course there is economic and societal value in good risk management and business continuity in and of itself. Our economy depends on businesses getting smarter about their climate risk. And our businesses depend on government to provide infrastructure and systems that can withstand stronger storms, more frequent floods and intense heat waves. In this way, climate change is also a sharp reminder of the interdependency between communities, governments, and business.

The challenges brought about by climate change call for renewed dialogue and partnership between the public and private sector, and social innovations to protect our communities and quality of life. Climate risk can be modeled, but adaptation responses need to be carefully handcrafted. As we help companies big and small measure the extent of their climate risk, we must also be there to help them collaborate with their communities to build a more resilient world. We may not be able to prevent the next Hurricane Sandy, but we can make sure that the lights stay on — for everybody.

Emilie Mazzacurati is a finalist for the Cartier Women’s Initiative Awards. CWIA is an international business plan competition created in 2006 by Cartier, the Women’s Forum, McKinsey & Company and INSEAD business school to identify, support and encourage socially responsible and creative companies led by women entrepreneurs.

On October 16, 2014, six Laureates, one for each region, will be awarded $20,000 in funding, a full year of coaching, a lifetime access to the Cartier Women’s Initiative Awards community and unique networking and visibility opportunities. To learn more visit here.

Obama Commits to Building Resilience – From the Ground Up

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

USGS Lidar MapObama’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.

LittleHoovercommission report coverIn “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.

By Aleka Seville

Images courtesy of USGS and Little Hoover Commission.

Risky Business: Taking Stock, and Taking Action.

In 2006, the British government released the world’s first and most comprehensive assessment of the economic impacts of climate change, led by economist Nicholas Stern. The Stern Review on the Economics of Climate Change was instrumental in establishing unequivocally the link between physical impacts of climate change and our economics, and helped dramatically shift the conversation on greenhouse gas mitigation.

Eight years later, the United States now has its own Stern Review. Risky Business: The Economic Risks of Climate Change in the United States provides the most comprehensive assessment of the economic risks our nation faces from the changing climate. The report focuses on the clearest and most economically significant of these risks: damage to coastal property and infrastructure from rising sea levels and increased storm surge, climate-driven changes in agricultural production and energy demand, and the impact of higher temperatures on labor productivity and public health.

Short Term Costs in the Billions

Screenshot 2014-06-25 01.17.42Let’s start with some of the short-term impacts – in climate-speak, short term is anytime between tomorrow and the next 15 years. The East Coast and the Gulf of Mexico will likely see an increase in the annual cost of coastal storms and hurricanes of $7.3 billion, bringing the total annual price tag to $35 billion on average. The agricultural sector in the Midwest and South may see decline in yields of more than 10% over the next 5 to 25 years if they don’t ‘adapt’ their crops and cultivation methods to the new climatic environment. Increases in temperature, heat waves and humidity will drive up demand for energy, calling for the equivalent of 200 new power plants across the country, which could cost up to $12 billion a year.

Long-Term Impacts Significant Threat to Property and Lives

As if this weren’t enough, the long-term projections present an even direr outlook. In the Northeast, the projected costs of sea level rise are estimated at $9 billion in property loss each year, directly affecting 88 percent of the region’s population. In the Midwest, extreme heat is expected to last an additional two months by the end of the century, resulting in a 73 percent loss in crop yields. In the Southeast, extreme heat is expected to last an additional four months by the end of the century, placing significant pressure on labor productivity, electricity costs and capacity, and could lead to 11,000 to 36,000 additional deaths each year in the region.

The report also makes the important connection between financial capital and human capital, providing estimates on the changing patterns of labor productivity and human health as a result of climate change. To quantify the potential impacts on human health, the report utilizes the Humid Heat Stroke Index, or HHS, to measure the combined stress of heat and humidity on the human body. Findings show that in the Midwest HHS will reach dangerous levels at least two days in each year by the end of the century and by as much as 20 days each year by 2200, during which time it would be impossible to remain outdoors without putting one’s life at risk.

This chart, from the report, offers a striking display of how average summer temperatures could increase if we don’t curb GHG emissions (click to enlarge).

statetemps_v2
Similar if not more severe temperature predictions are reserved for the South and Southwest where labor productivity could drop by 3.2 percent in key sectors like mining, agriculture, construction, utilities, transportation, and manufacturing. With a focus on average and extreme temperature increases, the report alludes to the challenges of switching from natural gas and oil-driven heating to electricity powered cooling. With the exception of the Northwest, electricity demand and costs across the US are expected to rise between 2 and 7 percent by mid-century. In somewhat uncertain terms, the report refers to greater pressure on the electrical grid system, along with local hospitals, banks, and insurance companies.

Reducing emissions – and more

An immediate and obvious conclusion from the report is the need to ramp up our greenhouse gas (GHG) mitigation efforts. The authors’ report administer a healthy dose of the precautionary principle, urging leaders in business, investment, and the public sector to consider the potential material risks of climate change at the regional and national level. Acknowledging the urgency behind climate change and the ever-increasing rate of range, these sectors are urged to reallocate capital to strategic mitigation investments in the short-term.

In the absence of aggressive adaptation measures, the Intergovernmental Panel on Climate Change reports that the threshold for keeping planetary warming at a tolerable level could be as little as 15 years. The Risky Business report effectively conveys this message in business terms and presents the material risks of climate change by highlighting the severe impacts on the US economy and our collective inability to ameliorate such risks in the near future.

Another important take-away is the need to start adapting to climate change – and fast! Even in the most optimistic scenario where the planet successfully contained GHG emissions, we are still bound to experience significant impacts from GHG already accumulated in the atmosphere. But while we have a pretty good sense of how to reduce our GHG emissions – the main hurdle is political, adaptation is a different story altogether.

Managing climate risks: what does it mean for businesses?

It’s one thing to be convinced we need to adapt, it’s another to understand and be able to quantify the many ways climate change may impact a business’s value chain. Climate change can impact businesses in their supply chain, their operations, their manufacturing or production processes, and their distribution network. It can affect the infrastructure businesses need to operate, shift consumer preferences or make products obsolete. The impacts of climate change can be gradual or abrupt, hit tomorrow or in 30 years.

Businesses may at times forget how they depend on ecosystem services, even if they’re not sectors directly dependent on natural resources like agriculture or mining. At the end of the day, businesses (and the humans that run them) all depend on food, fresh water, fiber, fuels, and other biochemical products that nature provides. Certainly, not all sectors are born equal from that standpoint – but the most sophisticated tech products still need water and energy to be manufactured, and minerals to be processed.

The chart below, drawn from the Millennium Ecosystem Assessment Synthesis Report, illustrates the many ways ecosystems support human and economic activities.

Screenshot 2014-06-25 01.39.36

And finally, not all companies are equipped to respond and rebound from this kind of disruptions. Any modern computers and servers and A/C and telecoms – all of which can be subject to disruption due to extreme weather events and costs increases over time. But some companies have business continuity plans and backup generators, and others may be put out of business by an extended power outage.

Taking Action

These differences can be analyzed, measured, and addressed. At Four Twenty Seven, we’ve developed a methodology to quantify the relative sensitivity of businesses to climate change that captures both their reliance on natural systems (ecological dependencies) and their exposure to weather variability, both in their operations and in their supply chain. We also have tools to assess an organization’s ability to respond to predictable and unpredictable changes.

This diagram illustrates how ecological dependency can vary by sector, hence creating different climate risk profiles for different companies (Source: Four Twenty Seven, Inc.).

Ecological Dependency Diagram
There’s no silver bullet to climate adaptation. But there are practical tools and steps a business can take to understand its exposure to risk, estimate potential costs and develop effective adaptation measures. The Risky Business provides an important economic context for the nation – now it’s time for businesses to start looking at climate risks in their own operations, and focus on building resilience.

By Emilie Mazzacurati and Nik Steinberg

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

A Closer Look at the Cap-and-Trade Investment Plan in Gov. Brown’s Proposed Budget

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.

Revenues

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”.

Expenses

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)

Auction Proceeds Proposed Budget 2014-2015

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

DisadvantagedCommunitiesMap

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.

Market Implications

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.

Conclusion

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.

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.)

Offsets

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.

Conclusion

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