California’s cap-and-trade program for greenhouse gas emissions took effect in January 2013, and as the period of enforcement unfolds, both regulated entities and the California Air Resources Board (which is responsible for the implementation and management of the program) are considering how best to manage costs within the system. Several cost containment measures are outlined in the program, including allowance trading and banking, offsets, and a compliance reserve, which makes a number of allowances available in individual years under a tiered pricing system.
The compliance reserve was the focus of a presentation I made in late June at a cost containment workshop hosted by the California Air Resources Board. In particular, I discussed the potential for price fluctuations that might result in higher-than-expected prices for allowances in the reserve, and outlined four options that could be used to help deal with price spikes:
- At the governor’s discretion, as outlined in California’s climate legislation, deadlines may be adjusted for individual regulations in extraordinary circumstances.
- The potential supply of allowances in the compliance reserve can potentially be expanded by including emissions reductions outside California.
- If reserve allowances under a given price tier are exhausted, additional allowances may be drawn from future annual allocations in the reserve.
- Determining plans for the program beyond 2020 will help regulated firms anticipate future obligations and adjust their behavior in the short term in order to account for needed allowances.