Viewpoint: California carbon market gets new neighbors

Oregon and Washington state will soon enter the carbon market fray on the west coast, following a year in which financial players dominated the headlines as they helped drive allowance prices to all-time highs.

Fresh net-zero commitments from corporate players ahead of the Cop 26 climate conference in Glasgow, Scotland, along with rising EU ETS prices, had financial players looking at the Western Climate Initiative (WCI) market this year, particularly California which has the largest carbon scheme in the US in terms of liquidity.

For the most part in California, participants are expecting the market to remain bullish in the long-term, after interest from speculative investors helped push prices up to record highs in the second half of the year.

California Carbon Allowance (CCA) prices rose steadily for much of the year. Argus assessed CCAs for December 2021 delivery at $18.55/metric tonne on 4 January. They crossed the $20/t mark in June, the $30/t mark in October, and hit a high of $35/t on 15 November. The price has since retreated but continued to hover under $30/t before the holidays.

The market could see some short-term volatility in the new year, however, as the Omicron variant spreads. Shutdowns could affect emissions and lower demand for allowances.

Oregon recently adopted its own version of a cap-and-trade program, a development that could prompt more carbon offset developers to enter the space. The state's Climate Protection Program is set to launch next year and aims to cap CO2 emissions from the use of natural gas and other fuels, including gasoline and diesel.

Fuel suppliers with products responsible for at least 200,000t of emissions will be regulated, as well as large stationary sources that emit more than 25,000t of CO2 equivalent on site.

The program will begin with an overall emissions cap of more than 28mn t of CO2 for 2022. That limit will then decline each year until hitting 3mn t in 2050, a 90pc reduction based on average emissions from 2017-19.

As an alternative, offset developers can create what are known as Community Climate Investments (CCIs) in environmental justice communities. Each CCI - equal to a reduction of 1t of CO2 equivalent - will be priced at $107/credit starting in 2023, rising by $1/yr. The credits cannot be traded and may only be held for two compliance periods.

Entities can use CCIs to cover up to 10pc of their emissions obligations during the first compliance period, which will run from 2022-24. The limit rises to 15pc in the second compliance period through 2027, and after 2028 increases to 20pc.

Oregon is not likely to join the WCI because its program design does not align with California and Quebec's cap-and-trade programs.

But Washington state is developing a WCI-modeled program that is scheduled to launch in 2023. The state recently announced it had joined the WCI to use the existing systems to run its auctions.

Washington's program will cover industrial facilities, power plants, natural gas suppliers and other fuel suppliers that emit more than 25,000t of greenhouse gases a year, with a starting cap of 66mn t in 2023. The program will be designed to help Washington achieve a 45pc cut in its greenhouse gas emissions by 2030, relative to 2005 levels, and net-zero by 2050.

The Department of Ecology, responsible for developing the program, recently said it plans to adopt three of California's carbon offset protocols including forestry, urban forestry and livestock.

By Julia Martinez