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Global price for carbon - medium or longer term perspective?
- Category: Emissions trading
CALIFORNIA PRICE FLOOR AND CEILING
In the California's emissions trading scheme the function of price ceiling serves the specific mechanism called Allowance Price Containment Reserve.
The Reserve is an account that is filled with a specified number of allowances removed from the overall cap at the beginning of the program. Covered entities may purchase reserve allowances at specified prices during direct quarterly sales. Covered entities gain flexibility through access to the Reserve if prices are high or entities expect prices to be high in the future. The Reserve will be filled with 1 percent of allowances from each year from 2012 through 2014, 4 percent of allowances from each year from 2015 through 2017, and 7 percent of allowances from each year from 2018 through 2020. This is equal to approximately 5 percent of total allowances in the program from 2012 through 2020.
Covered entities will have the option of buying from the reserve pool at fixed prices. The reserve allowances will not be available to voluntarily associated entities. Sales from the Reserve will take place for the first time on 8 March 2013 and then three weeks after each quarterly auction.
The Reserve will be organized into three equal tiers. Allowances in each tier will be available for purchase at fixed prices. Reserve allowances will be sold at prices of $40/metric ton for the first tier, $45/metric ton for the second tier, and $50/metric ton for the third tier in 2012. These prices will escalate by 5 percent plus the cost of inflation each year.
Purchases from the Reserve will be subject to the Holding Limit. In addition, allowances purchased from the Reserve will be transferred by the administrator directly to the purchasing entity’s compliance account, from which it cannot be removed until it is surrendered. It is to ensure that allowances are only purchased to meet compliance needs, not to provide a supply of allowances for speculative activity.
It is clear that covered entities having the possibility to buy the allowances from the Reserve at specified prices (i.e. covered entities in the California scheme) are in the more comfortable situation than those entirely exposed to the risks of free market prices (i.e. entities covered by the EUETS), the latter have, however, the option of hedging against this exposition at market conditions. It follows that the role of hedging activities could potentially be much greater in the EU ETS than in the California's scheme.
After the above considerations regarding price ceilings mechanisms it is appropriate to note that in the California scheme there are also safeguards to limit the excessive downwards price movements. Thus The reserve price has been proposed in the auction design at 10$/per metric ton for auctions in the 2012. For all years following 2012, this reserve price will be increased by 5 percent plus a consumer price index.
EU ETS - MARKET FORCES SOLELY?
The mechanisms similar to those as the Reserve are absent in the European Union Emissions Trading Scheme. There is New Entrant Reserve but it has different purpose. The European legislators intended probably that the market should be the one that discovers the price for CO2 allowances and that market forces shouldn’t be restricted in that process. So, in the EU ETS the whole array of price-movement drivers can be identified (politically motivated not excluding).
How to establish global price for carbon taking into account such divergent regulatory environment and differing price-setting mechanisms? At this stage it is difficult to analyse further options exceeding the sole problem presentation.
The unit traded at least remains the same being 1 tonne of CO2 equivalent. The Australian, Californian, and European units, however, obviously are not exchangeable.
The CER and ERU units, if they were eligible in all the schemes concerned on equal terms, could more easily represent the common carbon currency, subject to accorded valuation methodology. The price for the said Kyoto units is, however, the derivative of conditions for eligibility, thus also highly divergent among the said schemes.
Taking into account the above circumstances the common global price for carbon seems to be now a distant perspective.