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A bridge to somewhere: California AB-398, cap and trade re-authorization to 2030 and implications fo

Some quick scribbles on the implications for Canada of cap and trade extension in California,

(SP webinar video here)

Price ceiling, building on the containment reserve tiers and a buyout for the price ceiling will reduce the integrity of the cap (SGER tech fund buy-out equivalent, but real reductions needed to maintain cap integrity) but will slow the rise in the price (ceiling working with the two containment price reserves or speed bumps where cost thresholds release more permits. The allowance price is then a weighted average of the containment price tiers and ceiling).

AB-398 seems to weave a path between the allowance price close to the reserve price and concern that the 2030 targets would accelerate price increases to well over $100 USD:

  • Linking to the social cost of carbon in AB-398 means that we can expect price forecasts in 2030 in the CDN $80 range, at least for now. Price forecasts for AB-398 increase the price in 2030 by ~$20 above previous forecasts to about $80 to $90 CDN.

  • The higher price means more abatement in Canada.

Offsets. The limited use of offsets will of course put upward pressure on overall allowance prices. It's unclear whether this will affect offset supply out of California and into Canada. But for now, I think it helps CDN offsets on supply side due to Cali constraints and higher allowance price (risk is constrained Cali offsets go looking for a home in Canada). ON and QC following Cali lead on offset use would drive more domestic abatement for sure.

Free allocations. Continued free allocations for the LFEs takes pressure off Ontario and probably Québec to move to full auction. This is about political economy, making the current policy more durable I think. Continued pressure by California to move to full auction could only blowback politically at home.

Proceeds. California ties itself in knots over the use and distribution of proceeds to achieve all kinds of ends. This doesn't have much relevance to Canada although it seemed to drive the ultimate design that emerged in the California horse trading in the lead up to AB-398. I think the proceeds horse trading has ultimately hurt the design of the Cali system.

Federal floor. Some upward pressure in the short term on the WCI carbon price will help with the political economy of the two-tiered pricing benchmark that exists in Canada, between the WCI that has a lower market price and the federal price floor. Certainly, with the latest forecasts it's hard to argue that Québec and Ontario are getting a free ride, especially after 2023.

All for now.

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