ICF International, a provider of consulting services and technology solutions to government and commercial clients, has released its California Cap and Trade Market Outlook, a special report of ICF’s Integrated Energy Outlook series.
The study presents ICF’s views on emission allowance prices and the potential sources for emission reductions under California’s recently approved greenhouse gas (GHG) reduction program, as well as highlighting the program’s impacts on the California power market.
The analysis concentrates on the cap-and-trade aspect of California Global Warming Solutions Act (AB32) and develops a base case forecast of GHG allowance prices. The analysis also tests the sensitivity of this forecast against important variables, including the availability of offsets, the effectiveness of preventing resource shuffling of electricity imports, and the potential for achieving the ambitious slate of complementary measures that are part of AB32.
Among the Outlook’s findings:
- Most regulated entities in the program will not receive free allowance allocations for compliance and nearly all will be “short” allowances.
- Because of its low emissions baseline and the complementary measures that are already being implemented, there is only a small pool of low-cost reductions available in California. Most of the available reductions come from the industrial sector.
- The available offset supply under the currently available protocols is insufficient to meet the projected demand from the program.
- The carbon price generated as a result of the cap-and-trade component of AB32 will be significant, particularly in Compliance Periods (CP) 2 and 3 when the cap is expanded to the broader economy.
- The structure and effectiveness of limits on “resource shuffling” for purchases of out-of-state electricity generation will have a significant effect on allowance prices.
- The limits on allowance holding have a significant effect on allowance price formation.
- The program will result in a significant increase in wholesale electricity prices, although the impact is diluted and mitigated at the retail level.
“ICF has produced this analysis to assist those entities affected by, and interested in, the California program,” said Steve Fine, vice president for ICF International and one of the principal authors of the report. “The report addresses the tremendous complexity of the regulations, the number of entities involved, and the interaction between the cap-and-trade program and complementary measures.”
Using a suite of proprietary analytical tools, along with data provided by the California Air Resources Board, ICF developed a framework to assess California’s multi-sector emission trading scheme that accounts for emission reduction options from covered sectors, from noncovered sectors (offsets), restrictions on banking of allowances and restrictions on offset usage.