Level of policy ambition to determine 2030 WCI carbon allowance price: CaliforniaCarbon.info

SAN FRANCISCO - Aug. 11, 2015 - PRLog -- Today, analysts at CaliforniaCarbon.info, a Climate Connect website, published a forecast for 2030 carbon prices in the Western Climate Initiative (WCI), an emissions market which links California and Quebec. The firm’s previous forecast had only modelled for prices and emissions until 2020.

“The WCI has shown in the past few years clear signs that it is a program that is here to stay,” said Nitin Tanwar, Climate Connect’s CEO and founder, “We are pleased that we are now able to offer the market a model which it can use to project prices through the next decade, especially during a time when business and politics alike will be focusing heavily on the fight against climate change.”

Last week, US President Barack Obama finalized a Clean Power Plan slated to bring 32% reductions to the GHG emissions of the national power generation industry. This is viewed as a key milestone towards negotiations set to take place at the Conference of the Parties summit in Paris at the end of this year.

The research concludes that 2030 prices may range from US$32 to US$55, depending on the combination of scenarios for economic activity and policy ambition. In April this year, California governor Jerry Brown announced an executive order mandating a 40% GHG cut from 1990 levels, to be achieved by 2030. According to this model, the 40% level of ambition results in a 2030 carbon price of US$47 to US$55. Two less ambitious scenarios are also considered – 25% and 30% reductions from 1990 levels – with the former producing a low-bound price of just US$32, as against the estimated price floor of US$29.

“This very clearly illustrates the significance of policy ambition and the level of the cap, to the final allowance price and to the dynamics of the carbon market,” observed Rahul Rana, product manager and lead analyst at CaliforniaCarbon.info, “It reinforces the importance of declaring not just a final target, but also annual budgets, well in advance, so that affected stakeholders have time to adjust their strategies both for their core operations and for regulatory compliance.”

The higher prices in the 40% scenarios result from higher expected allowance shortages. With a 40% target, the bullish economic activity scenario (3% annual real GSP growth rate) produces a cumulative shortage of some 450 million. With a 25% target, the same scenario only produces 130 million in cumulative shortage. The model predicts that prices lift significantly off the floor only when cumulative surplus (a result of the generous supply in the program’s early phases) becomes cumulative shortage. Therefore, although annual shortage in the baseline scenario first emerges in 2021 and then rises, prices remain close to the floor through 2026. With rising annual shortage, a surplus built up over eight years is canceled out within the next six.

‘However, it should be noted that annual shortage increases at a decreasing rate. In other words, if the assumptions were to be extended for a period beyond 2030, it is likely that annual shortage would peak and then decline,’ noted Chandan Kumar, the economist who prepared the report. In the model, input variables are adjusted to reflect a variety of responses to both the rising carbon price and to other forms of policy- or market-led change.

Key take away messages of CaliforniaCarbon.info’s 2030 carbon market analysis:-

1. Despite population growth, absolute petroleum consumption in California is marginally decoupling vis-a-vis a growing economy.

2. Approximately 300 million compliance instruments (allowances and offsets) are expected to be carried over from 2020 to the next period of 2021 to 2030, assuming that banking of allowances and offsets will be allowed.

3. Across the target emission reduction scenarios (25%, 30%, and 40% of 1990 levels by 2030) the expected carbon allowance price will be in the range of $32 to $55 against an estimated reserve price of $29.

4. For the BAU scenario, an emission reduction target of 25% of 1990 levels will create a cumulative shortage of just over 30 million in 2030, whereas a 40% target, considering the same emissions scenario, will create a cumulative shortage of 370 millions.

CaliforniaCarbon.info analysts will be hosting a webinar on Thursday, August 13, at 10am PT, to discuss in further depth the report and its implications for the various market stakeholders. To obtain more details, please email contact@californiacarbon.info.