E&E’s Anne Mulkern quotes me in a Climatewire story about current conditions in California’s carbon market, where prices have dropped significantly below the price floor. That’s a problem for state budgets because the government won’t sell new allowances at the upcoming May auction for less than the price floor, currently $16.68 per allowance in 2020. If secondary markets continue to trade at lower prices, then we should expect companies not to buy all of the allowances on offer in May’s auction—and that, in turn, could mean the state’s climate budget funds will take a significant hit.
We’ve seen this happen before:
Danny Cullenward, a Stanford researcher, said cap-and-trade auctions faltered in 2016 not long after spot market prices fell. In May that year, 90% of available allowances failed to sell, leaving at least $880 million in revenue out of reach, according to a paper he wrote for The Electricity Journal.
"A penny below the floor is significant," Cullenward said. "That is strongly indicative for the demand at the quarterly auctions to fall short."
The non-partisan Legislative Analyst’s Office has a great figure showing volatility in state climate proceeds from quarterly cap-and-trade auctions (see here):
The problem in today’s market is that the California Air Resources Board chose to keep the program oversupplied—possibly all the way through 2030—which means that prices were stuck near the price floor prior to the economic slowdown. Under those conditions, the wasn’t any room for markets to adjust to macroeconomic changes without risking demand destruction at future auctions.
For those interested in the data on the 2016 market crisis, my article with Andy Coghlan in The Electricity Journal is available here. For more on the oversupply outlook through 2030, see this preprint of a paper currently under peer review.