Price Containment in the California C&T Market Emissions Market Assessment Committee Quarterly Meeting September 24, 2012 1
Forecasted BAU GHG Emissions Compared to the Allowance Cap Covered Entities Only 2013 - 2020 450 394.5 382.4 400 370.4 358.3 346.3 334.2 350 300 Millions CO2e 250 200 162.8 159.7 150 100 50 0 2013 2014 2015 2016 2017 2018 2019 2020 BAU Forecast (Phase 1&2 entities) BAU Forecast (Phase1 entities) AB32 Cap 2
Price Containment Reserve • CARB sets minimum price at which it will sell permits in auction • At high price, CARB stands ready to sell permits from a reserve Limited quantities at prices of $40, $45, $50 • • If all reserve quantities at these prices were sold and the reserve were exhausted, what would happen? – Is unrestricted price rise politically credible? • RECLAIM during CA electricity crisis – Defending a hard price cap likely to improve market • Could be done by borrowing from post-2020 3
Supply of Abatement with Containment Reserve Allowance Price 50 40 Electricity Dispatch Changes; Industrial Processes Changes; Fuels Consumption Changes Offsets Costly Complementary Costless Reshuffling Measures Reshuffling 0 GHG Reductions
Supply of Abatement with Hard Price Cap Allowance Price P cap Electricity Dispatch Changes; Industrial Processes Changes; Fuels Consumption Changes Offsets Costly Complementary Costless Reshuffling Measures Reshuffling 0 GHG Reductions
Benefits of Defending a Price Cap • Limits the possible price and economic impacts from volatility in supply or demand – Especially if abatement supply is very inelastic • Avoids possible market disruption if shortage occurs near end of market period (2020) • Eliminates price increase that incorporates low probability of skyrocketing price • Eliminates incentive to push price above current reserve levels through market manipulation 6
Costs of Defending a Price Cap • Reduces predictability of California GHG reductions – Only if alternative is true commitment to reduction regardless of cost – A smooth functioning C&T market is more likely to be expanded to other states and countries 7
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