California legislators have voted to extend the state’s cap-and-trade program until 2030. With the Canadian provinces of Quebec and Ontario joining in 2018, the Carbon Trust estimates nearly US$5 billion in new demand for offsets.
With California’s cap and trade system in place through 2030 and explicit demand for offsets in the legislation, The Climate Trust (The Trust) forecasts that North American carbon markets will demand a cumulative US$4.86 billion of offsets from 2017 through 2030.
To calculate total allowable offset usage in California, this analysis applies the reduced offset limits embodied in AB 398 for the post 2020 period to an ICIS Analytics forecast for emissions from capped entities in California. Historically, roughly half of the allowable offsets have been used.
The “usage range” varies (between 40 per cent to 60 per cent) depending upon how you interpret compliance instrument surrender volumes from the current compliance period, which has, so far, only required regulated entities to turn in 30 per cent of their compliance obligation.
The analysis therefore assumes that only half of the allowable offsets, even at the reduced limits, continue to actually be used in California.
The Trust believes this is a conservative assumption. With less than 90,000 offsets invalidated of the more than 83.5 million offsets issued to date (that’s roughly 0.1 per cent), invalidation risk has proved to be minor.
Now, with prices on the rise and the longevity of the cap and trade system assured, usage could rise.
Assuming the percentage of the offset limit actually grows linearly to 75 per cent by 2025 (including in the Canadian jurisdictions discussed below), our analysis concludes that compliance entities would demand an additional US$2.74 billion credits through 2030 in addition to the US$4.86 billion described above.*
On September 22nd, California Governor Jerry Brown, Quebec Premier Philippe Couillard and Ontario Premier Kathleen Wynne formalized the linkage of the three jurisdictions starting in 2018. The Trust forecasts that California will make up roughly 62 per cent of the emissions in this linked market, with Ontario at 27 per cent and Quebec at 11 per cent.
The analysis makes two major assumptions about offsets in the Canadian provinces. First, both jurisdictions currently allow offsets to be used for up to 8 per cent of compliance obligations.
Most market participants do not believe that the Canadian provinces will be required to match the reduced offset limits in California in order to remain linked (though no official statement or policy on this issue has been announced).
Given California’s previous acceptance of the Canadian jurisdictions alternative system for managing invalidation and California’s newly established price ceiling, we do not believe different usage limits will pose a threat to the stringency-analysis required for linkage.
There is less historical data to draw on in order to make an assumption around how many of the allowable offsets compliance entities will actually use in Canada.