Tracking banking in the Western Climate Initiative cap-and-trade program

Abstract

The Western Climate Initiative is a multilateral cap-and-trade program in California and Québec. The California climate regulator has called for cap-and-trade to deliver nearly half of the emission reductions needed to achieve the state’s legally binding limit on greenhouse gas emissions in 2030, making the program the single biggest driver of the state’s post-2020 policy portfolio. However, the program’s supply of compliance instruments has persistently exceeded emissions subject to the program—a condition known as overallocation, which independent studies have projected may continue into the mid-2020s. If market participants purchase and bank excess compliance instruments for future use, they may be able to comply with the program’s regulations while nevertheless emitting significantly in excess of the state’s legally binding 2030 limit. Here, we present methods for tracking observed banking behavior on both an annual and multi-year compliance period basis. By the end of 2018, market participants had already acquired more unused compliance instruments than the regulator anticipated for 2020. The size of the private bank is now comparable to the cumulative mitigation expected from the program over the period 2021 through 2030, raising questions about the program’s ability to achieve its expected reductions. Beyond diagnosing market conditions, banking metrics can also help policymakers design dynamic program reforms that increase program stringency conditional on observed market behavior deviating from expectations.

Climate Change Mitigation, Air Pollution, and Environmental Justice in California

“…As a qualification of note, the cap-and-trade program overall and its offset component do not currently have a large impact on either CO 2 e or co-pollutant emissions reductions in the state. For CO 2 e emissions, the impact has been small because there are more allowances in the program than (covered) emissions to date .…”

Technological avenues and market mechanisms to accelerate methane and nitrous oxide emissions reductions

“…In Québec, Canada, an ETS was started in 2011 and formally linked with California’s in 2014. 142 The Québec program covers 78% of GHG emissions and includes CO 2 , CH 4, N 2 O, NO 3, and fluorinated GHGs. 143 New Zealand introduced an ETS in 2008 and established a cap on emissions in 2020, covering about 50% of emissions, including CH 4 and N 2 O.…”

Beyond Carbon Pricing: Tax Reform is Climate Policy

“…Others point to a significant leakage problem: the cap‐and‐trade program in California has simply shifted emissions associated with coal‐fired power to other Western States (Caron et al, 2015; Lo Prete et al, 2019; Petek, 2020). Still others indicate that the cap‐and‐trade scheme has had little effect due to overallocation, leakage and low prices (Cullenward et al, 2019; Mastrandrea et al, 2020).…”