CALIFORNIA TRADING THE NORTH AMERICAN CARBON MARKET
CONTENTS 4.
California Trading:
Welcome to the North American Carbon Gold Rush
6.
Market Value
7.
Huge Growth Forecasts
8.
Top Buyer Demand and Transaction Volume
10.
Welcome to the Climate Action Reserve
2
CALIFORNIA TRADING: Welcome to the North American Carbon Gold Rush As the world’s 12th largest source of global warming
In order to achieve such carbon reductions, California
pollution, California can make a world of a difference
is leading the way in America by pioneering its own
to the global fight towards reducing the impacts of
regional initiative, by creating its own market orientated
anthropogenic induced climate change. As economies
solution through implementing a carbon cap and trade
go, California’s position cannot be underestimated.
system known as the ‘California Emissions Trading
It is the 8th largest economy in the world, generating
Scheme’ (ETS). The California cap and trade program
an annual GDP of $1.9 trillion, accounting for 13%
officially began in 2012 on a voluntary basis, with its
of the United States’ entire GDP. California, a single
mandatory compliant sector set to commence in January
state within the U.S. has a larger economy than Brazil,
2013. The California ETS will govern approximately 350
Russia and India, making it a critical industrial player.
of the biggest polluting installations (covering around
In 2006, the California Air Resources Board ratified the
600 facilities), giving them annual emissions caps to
‘California Global Warming Solutions Act’ (AB 32), which
adhere to.
implements their target commitment of reducing their level of carbon emissions output by 30% below 1990 levels by 2020, and by a further ambitious 80% by 20501. The United States as a whole have set an emissions reduction target of 17% in comparison to 2005 levels by 20202, which displays that the state of California is leading the initiative by acting as the blueprint example
Just like the European Union Emissions Trading Scheme, for every company who exceeds their emissions cap, they too will be legally obligated to offset their emissions via the purchase of carbon credits, and those who fail to do so will face much heavier fines for each ton they fail to offset.
within the U.S. for aggressively reducing its output of greenhouse gas emissions.
California Environmental Protection Agency, Air Resources Board: Cap and Trade, http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm August 2012 1
United Nations Framework Convention on Climate Change: Quantified economy-wide target for 2020. http://unfcc.int/meetings/copenhagen_dec_2009/items/5264.php 2
www.wavemanagementinc.com
3
4
The Principle Premise: No Pain, No Gain Having seen the European compliant market experience a price collapse in its UN approved carbon offsets, predominantly due to an oversupply within the marketplace, it is safe to say that the California regulators have learned from its lessons. The fact is, that California simply does not care about the current low pricing of carbon offsets within the European market. Under California’s new carbon trading system, the biggest polluters will have to cough up big money to pay for how they pollute. The Golden State is determined to change the habits of its biggest polluters. They fundamentally recognise that when the cost of polluting starts to pinch and truly impacts upon the finances of the big polluters, this will in turn be the catalyst for greater innovation where California will lead the world in green technology. The basic premise of “no pain, no gain� is going to see the price of carbon offsets rocket within the California trading system. When the compliant arm of the Californian carbon market kicks off in 2013, prices will be far higher than the existing ones within the European or New Zealand markets3.
Allan, M & Krupp, M. Reuters, Carbon Trading May Be Ready for Its Next Act. http://www.nytimes.com/2011/11/14/business/energy-environment/carbon-trading-may-be-ready-for-its-next-act.html?_r=1, Nov 2011 3
www.wavemanagementinc.com
5
6
North American Carbon Offset Market Grew in Value by 70% in 2011 Predominantly driven by a 33% increase in the volume traded in comparison to 2010, the year 2011 produced some extremely positive results within the North American carbon market. The value of the offset market achieved a worth of $168 million in 2011, in contrast to the value of $99 million in 20104. Despite the vast majority of all offset trading occurring over-the-counter in 2011, Olga Chistyakova, a Senior Analyst at Thomson Reuters Point Carbon stated that “we expect exchanges to begin offering offset contracts soon, so 2012 may see a rapid increase in the share of offsets transacted on exchanges. We also expect an overall increase in traded volume over the coming months, as regulators add more protocols to the list of credit types eligible in the Western Climate Initiative (WCI)�.
Point Carbon, Thomson Reuters. Value of North American offset market grew by 70% last year. http://www.pointcarbon.com/aboutus/pressroom/pressreleases/1.1889520, May 2012 4
www.wavemanagementinc.com
7
8
Huge Market Growth Forecasts As noted by Thomson Reuters, this new marketplace
To integrate companies into the California carbon
is set to experience rapid expansion. With the current
trading system, it is predicted that the first few years
market value sitting just under $2 billion, it is due to rise
will most likely be relatively easy for polluters in
to approximately $10 billion by the year 2016, equating
comparison to how it will become once the market
to an explosive forecast of an 80% rise within just 4 years.
gains further maturity. This is largely due to the number
Following the general market growth predictions, future
of free permits that will be issued in order to get the
pricing forecasts are equally as bullish. For instance,
ball rolling, and to get companies operating within the
Trevor Sikorski, a senior commodities analyst at Barclays
system. Prices for contracts in 2013 are generally just
Capital notes that the price of carbon rising from $16
a few dollars above the set floor price of $10 per ton,
per ton in the first three years of the program, 2012-
which is not a significant amount in terms of having the
2014, to an average of $40 per ton in the second period
desired impact of truly changing a company’s behaviour.
and $73 per ton in the third period, 2018-2020. In 2020,
No one disputes that a major price hike is on its way, it
Thomson Reuters are forecasting that prices will increase
is simply just a matter of timing. The state of California
to between $69 and $87 per ton . The creators of the
is projecting that 2017 will be the first year when the
California cap and trade system believe that such heavy
supply is actually outstripped by the demand, although
pricing will act as the perfect catalyst to spur innovation
Point Carbon, Thomson Reuters are predicting this to
amongst companies who are keen to cut costs, thus
happen a little earlier in 2016.
5
channelling them to operate on low-carbon budgets, whilst minimising their negative environmental impacts. YEAR 2012 2013 2014 2015 2016 2017 2018 2019 2020 PRICE $10 *$14 **$15 **$16.50 $19 $30 $47 $64 $82
Point Carbon, Thomson Reuters: Providing critical insights into energy and environmental markets, 20116 *www.bloomberg.com/news/2012-11-21?bnef-lowers-california-carbon-price-forecasts-after-first-sale.html, 2013 **Wave Management Analytical Division Feb 2013
5 6
Henderson, P. Thomson Reuters, The California Carbon Rush, 2011 Point Carbon, Thomson Reuters, 2011, 14th Annual EPA LMOP Conference 14th Annual EPA LMOP Conference
www.wavemanagementinc.com
9
10
The U.S. tops the table for voluntary buyer demand for offsets Whilst buyers within the European region maintained their status as the largest source of offset demand, with transactions of 33 MtCO2e amounting to $204 million – the United States comes out on top with regards to country-level and pure voluntary demand, purchasing a total of 29 MtCO2e with 19 MtCO2e of which being for purely voluntary purposes, with a total value of $159.
Ecosystem Marketplace and Bloomberg New Energy Finance. Developing Dimension: State of the Voluntary Carbon Markets 2012, p10/110 7
www.wavemanagementinc.com
11
12
Map of Transaction Volume by Project Location, OTC 2011
8
The large volume of voluntary offsets transacted in the United States in 2011 can be attributed to large-scale climate actions undertaken by buyers like General Motor’s Chevy brand and Norfolk Southern railway, but also some consistent voluntary marketplace participants such as Disney, UPS, Coca-Cola, Google, Dell, CBRE, JetBlue, Staples, Ebay, amongst many other multinational blue chip organisations who are all developing their environmental strategies to the forefront of their business agendas.
8
Ibid, p63/110
www.wavemanagementinc.com
13
14
Welcome to the Climate Action Reserve Based in California, the Climate Action Reserve is the number one premier offset registry for the North American carbon market. It encourages and facilitates businesses to take action to reduce their greenhouse gas (GHG) emissions via ensuring the environmental integrity, transparency and financial value of registered emission reduction projects within the U.S carbon marketplace. Its primary objective is to promote the reduction of greenhouse gas emissions by pioneering credible market-based policies and solutions. It does this by establishing regulatory-quality standards for the development, quantification and verification of greenhouse gas emission reduction projects in North America; issuing carbon offset credits known as Climate Reserve Tonnes (CRT) generated from such projects; and tracking the transaction of credits over time in a transparent, publicly accessible system. Adherence to the Reserve’s high standards ensures that emission reductions associated with projects are real, permanent and additional, thereby instilling confidence in the environmental benefit, credibility and efficiency of the U.S. carbon market 9. 2011 was a year that marked significant growth for the Climate Action Reserve. By the end of December, the Reserve had over 400 account holders in 45 states throughout the U.S. and nine countries. Nearly 500 carbon offset projects had been registered, with over 20.6 million Climate Reserve Tonnes (CRTs)
being issued.10 Alongside the Californian compliant market, the Reserve has also played a critical and expanding role within the voluntary carbon market. While more businesses are analyzing their activities and reducing emissions where they can, it is often not realistic to completely eliminate 100 percent of emissions. Corporations, academic institutions and events voluntarily chose to purchase CRTs to balance emissions produced for a variety of activities, including corporate operations and travel. Just a few of these voluntary buyers include the likes of UPS, Disney, Chevrolet, Sony Pictures, Coca-Cola, Google, Dell, CBRE, JetBlue, Staples, Ebay, amongst many other multinational blue chip organisations who are all developing their environmental strategies at boardroom levels. 2011 has also seen a significant increase in the number of operational projects along with the number of emission reduction credits that have been retired as well. The number of projects in 2011 grew to 483, representing a 30% increase upon the number in operation in 2010. In terms of the number of credits that were retires for offsetting purposes, this experienced a significantly greater rise. In 2010, the number of retired credits amounted to 1,111,649, whereas 2011 saw this number jump to 3,037,465 11, representing an increase of 173%. Such an increase is testament to the nature of growth in demand from businesses who
www.climateactionreserve.org/wp.../Policy-Manager-2012-Final.pdf, Accessed June, 2012 Climate Action Reserve Annual Report, 2011. 11 Climate Action Reserve Annual Report 2010 & 2011 9
10
www.wavemanagementinc.com
15
are actively engaging in offsetting their excess carbon emissions. Whilst the North American carbon market is currently being driven by regional initiatives, the fact that California is leading the way bodes very well with regards to setting the trend in terms of becoming the catalyst for enticing other states to participate as well. As California’s Silicon Valley is the home of innovation and start-up companies, the President of the Climate Action Reserve, Gary Gero, had this to say: “If California gets it right, others will see it’s possible to regulate greenhouse gas emissions while protecting its economy and while fostering a new green economy and industry. People watch what California does and do emulate it. Future cap-and-trade programs are going to pick up a lot of the design features we are implementing here. You’ll see regional programs develop. They will put pressure on the federal government. It will send out ripples around the country.12” One thing is for certain, the California carbon market is set to boom and it undoubtedly spells exciting times for North America as a whole, along with the rest of the world with regards to our fight against climate change – which is perhaps the greatest political, economic, environmental and social challenges of the 21st century. Perhaps the most encouraging thing of all is that after 40 years of inaction since the Rio Earth Summit in 1970, we have finally developed a proven market-orientated solution that can regulate the output of greenhouse gas emissions, enabling us to reduce emissions on a truly global scale. With North America fully integrated
12
into a carbon trading system as it is widely expected to do so, the global carbon market is expected to grow from $176 billion in 2011 to a staggering $2 trillion by 2020. Climate Reserve Tonnes (CRT’s) are highly renowned as being among the highest quality offsets available within the American emissions trading market. This means that CRT buyers can be confident that the offsets they purchase provide true and credible benefit to the environment. The California Air Resources Board (ARB ) has recently announced that CRTs from certain methodologies will eligible to be converted to ARB offset Credits and fully accepted as AB-32 compliant offsets. The news that CRT’s will be eligible for conversion to AB-32 compliant ARB offset Credits has already sent the price of these units from $6 to $12. These units will make it easier for companies to offset their emissions through projects located outside of the State of California. According to the regulations, the California carbon market will be comprised of 2.7 billion allowances from 2012-2020, starting with 165.8 million metric tons of carbon dioxide equivalent (MtCO2e) in 2012 under the cap. Based on allowance budgets in 2012 and the auction price floor of $10 per metric ton.13 Reuters report that in April 2012, California carbon allowances (CCAs) for delivery in 2013 hit their highest price this year, gaining $1.85/tonne from the previous week to close at $15.50/t, on the back of new buying, market sources said. A trader said that “buying around $15 with a $10 auction floor is a pretty good trade.14
Gero, G. Los Angeles Times, California becomes first state to adopt cap-and-trade program, October 21, 2011
The Frontier Carbon Market: California Releases AB 32 Rules. http://www.evomarkets.com/pdf_documents/The%20Frontier%20Carbon%20Market_%20California%20Releases%20AB%2032%20Rules.pdf 13
16
www.wavemanagementinc.com
California, the second-biggest carbon polluter in the U.S., behind Texas, noted that companies offered an average $15.60 a ton for emissions allowances in a state auction in November. Futures based on California carbon permits for 2013 were unchanged in December 2012 at $13 a ton. Prices jumped to a six-week high of $13.20 on the 3rd of December.15
TITLE
The California Air Resources Board sold all 23.1 million carbon permits offered at a November 14 auction for the first compliance period of the state’s emissions program commencing in January 2013. The allowances cleared at $10.09, 9 cents above the $10 “floor price,” or the lowest price allowed. Thomas Marcello, an analyst for Bloomberg New Energy Finance in New York said that “power, oil and gas companies were bidding for large volumes near the auction floor price,” Bloomberg New Energy Finance has issued its new price forecasts for contracts expiring this December, as well as December 2013, 2014 and 2015. Those expiring this December will sell at $11.90.16 With regards to pricing stability and price transparency,
12
the California carbon market has safeguarded itself by implementing an auction floor price of $10, where we have seen all trading exceed the floor price, primarily due to the increase in future forecast projections from every analytical corner, along with the fact that auction allocations have in fact been squeezed by a significant and growing demand from both offsetters and speculators. The California Air Resources Board (ARB) held its second auction of greenhouse gas allowances (GHG) on February 19, 2013. The auction included a Current Auction of 2013 vintage allowances and an Advance Auction of 2016 vintage allowances. The Auction Administrator of the ARB reported that the 2013 auction clearing price was $13.62 per allowance, with a total of 12,924,822 2013 allowances sold. The auction was a complete sell out, and there were 2.47 bids made for every allowance17. The Auction Administrator reported that the 2016 auction clearing price was $10.71 per allowance with 4,440,000 total 2016 allowances sold. The Market Monitor confirmed that the 2013 auction clearing price was $13.62 per allowance and that the 2016 auction clearing price is $10.71 per allowance.
Gero, G. Los Angeles Times, California becomes first state to adopt cap-and-trade program, October 21, 2011
The Frontier Carbon Market: California Releases AB 32 Rules. http://www.evomarkets.com/pdf_documents/The%20Frontier%20Carbon%20Market_%20California%20Releases%20AB%2032%20Rules.pdf 13
California carbon soars 14 pct as new buyer enters. http://www.reuters.com/article/2012/04/20/california-pointcarbon-idUSL2E8FK03L20120420 April 2012 14
15
http://www.bloomberg.com/news/2012-12-06/california-carbon-permits-bids-averaged-15-60-last-month.html - Dec 6th, 2012
California Carbon Allowances Sold Out at $10.09 in Auction. http://www.bloomberg.com/news/2012-11-19/california-carbon-allowances-sold-for-10-09-in-first-auction.html Nov 2012 16
California Carbon Permits Sell Above Expected Clearing Price. http://www.bloomberg.com/news/2013-02-22/california-sells-carbon-allowances-for-13-62-each-in-auction.html Feb 23 2013 17
www.wavemanagementinc.com
17
18
Qualified Bid Summary Statistics
18
Current Auction of 2013 Vintage Allowances Total 2013 Allowances Available for Sale:
12,924,822
Total 2013 Allowances Sold at Auction:
12,924,822
Auction Reserve Price:
$10.71
Settlement Price Per Allowance:
$13.62
Allowances Purchased by Compliance Entities:
88.15%
Bid Price Summary Statistics Maximum Price:
$ 50.01
Minimum Price:
$ 10.71
Mean Price:
$14.71
Median Price:
$12.56
Overall, February’s auction showed extremely encouraging results. With companies such as BP, Chevron and Exxon Mobil participating in placing bids, every allowance was sold out well above the expected clearing floor price. Also, with the number of bids outstripping the number of allowances available, we can see that present and future demand is very strong. The greatest assets of the Californian carbon market are that the supply of allowances is carefully restricted to prevent any oversupply, and the minimum floor price in place, which is driving the price of carbon permits forwards.
California Air Resources Board Quarterly Auction 2. http://www.arb.ca.gov/cc/capandtrade/auction/february_2013/auction2_feb2013_summary_results_report.pdf Feb 2013 18
www.wavemanagementinc.com
19
20
F Forest
L Landfill
L Livestock
O Ozone Depleting Substances (ODS)
O Organic Waste Distribution
N Nitric Acid Production
O Organic waste Compressing
C Coal Mine Methane
TITLE
Account Holders
402
Total Projects
483
Total Registered Total Listed Total New Total Completed
CRTs Issued
118 238 119 8
20,666,913
Landfill
7,908,250 Livestock 434,528 Forest 2,917,146 Nitric Acid Production 2,541,231 Coal Mine Methane 145,639 Ozone Depleting Substances 6,675,662 Organic Waste Digestion 44,457
CRTs Retired
3,037, 465
www.wavemanagementinc.com
21
Wave Management Inc. is a limited liability company incorporated and registered in Gibraltar with registered number 106218 Our registered office is 7 Montarik House, 3 Bedlam Court, Main Street, Gibraltar. Wave Management Inc. do not require licensing from, and is not regulated by the Gibraltar Financial Services Commission, or any other regulatory or supervisory body in Gibraltar or elsewhere. Wave Management Inc. would like to state that all information provided is for research and educational purposes only, and is not to be taken or regarded as an endorsement or recommendation as giving investment advice. We strongly encourage people to consult an FSA registered Independent Financial Advisor (IFA) before committing to any form of investment product.