Overview of the California
Carbon Market
Presented by:
Randy Lack
Founder & Chief Marketing Officer
September 2011
CONFIDENTIAL AND PROPRIETARY
ELEMENT MARKETS INTRODUCTION - US
Emissions House of the Year - 2010
Launched in 2005, Element Markets has become the largest integrated environmental
credit marketing and project development company in North America
 Leading marketer of environmental commodities in the US with a focus on Emissions, GHG, and
Renewable Energy Trading and is the largest account manager in CAR.
 Transacted over $700,000,000 in environmental credits since inception in 2005
 Has retired over 500,000 tonnes of CAR offsets voluntarily for clients in the last 12 months
 EM is one of the largest developers of biogas projects in the US and owns the largest Anaerobic
Digestion Project in North America that produce
Business Units
Renewable Energy Group
Biogas Development
Credit Marketing
Project Types
Greenhouse Gas (GHG) and Emissions Services
GHG Offset Projects
Credit Marketing
Marketing Compliance Solutions
• Methane (Landfills, Coal Mines, Agriculture)
• Asset Management
• Industrial Gases (N20 & ODS)
• Credit Aggregation
• Forestry
• Credit Monetization
AB32 PROGRAM OVERVIEW
Background
• In December 2010, the California Air Resources Board approved California’s proposed cap and trade
regulations, a key part of the AB32 / The Global Warming Solution Act of 2006
• In late June, CARB Chairwomen Mary Nichols announced that California would delay the compliance
obligation for affected entities under AB32 for one year
• Beginning in 2013, the regulations will cover GHG emissions from electric generation facilities, industrial
emitters, and fuel suppliers, and require them to reduce emissions to 1990 levels by 2020
• The program will be implemented over 3 phases or compliance periods: 2013-2014 (Phase I); 20152017 (Phase II); 2018-2020 (Phase III)
Covered Entities
•
Phase I (2013-2014): Electric Generation Units, Industrial Stationary Sources (including Carbon
Dioxide Suppliers) and Importers of Electricity from specified sources with emissions over 25,000
tpy, as measured in any single year from 2008-2011. Also included is electricity from unspecified
source – threshold is 0 MWhs
•
Phase II and Phase III (2015-2017, 2018-2020): Liquid fuel suppliers and suppliers of natural gas
with emissions >25,000 tpy. Also included are importers of electricity – threshold is 0 (tons or
MWhs) for all sources of electricity
AB32 PROGRAM OVERVIEW
Effects of Reduced Emissions on an Entity’s Compliance Obligation
• Entities are in the program until their emissions are below 25,000 tpy for an entire compliance period
or if they shut down the facility
•
If a facility triggers the threshold in any year, they must remain in the program until the end of
the current compliance period at a minimum
• Note that entities can opt into the program and be eligible to receive free allocations; they can
subsequently opt out after a compliance period
Compliance Instruments
• Allowances issued by ARB
• Allowances / Offsets from programs linked to California (e.g. Western Climate Initiative states)
• Offset credits issued by ARB (including Early Action offsets)
• Sectoral-based Offset Credits
AUCTION FORMAT
• First Auctions – August 15, 2012 and November 14, 2012
•
For 2013 allowances
Auction
Allowance Reserve
Frequency
Quarterly Auction
3 weeks after each quarterly auction
Available for sale
Current vintage and current
vintage + 3 years
121.8 million tons (from future vintages and through
borrowing from future years) available at start of
program
Format
Single-round, sealed-bid, uniform
price format
Fixed Price Sale - Tiers of Allowances, with minimum
purchase price for each tier; Participants submit bids
for purchase of allowances from each tier
Who can participate
Anyone
Covered Entities under AB32, possibly covered
entities from linked programs
Floor Price (2013)
Min. price of $10 (constant
$2009)
($10 for 2015 vintage)
$40 (Tier I)
$45 (Tier II)
$50 (Tier III)
Floor Prices (2014+)
Increases every year by CPI+ 5%
Increases every year by CPI+ 5%
OFFSETS
•
•
Based upon the current offset %
allowed for compliance the estimated
maximum amount of offsets used for
each Phase is as follows:
• Phase I – 25.8 million
• Phase II - 91.8 million
• Phase III – 83.1 million
To date, only 5.1 million tonnes of ARB
eligible offset credits have been issued
under the Climate Action Reserve
• Only 4.2 million tonnes of those
credits have not been retired
and are still available
Offset supply right now is expected to
be low compared to the maximum
amount that can be used
• At least until additional protocols
are approved by ARB
Maximum Offsets Allowed
35
30
25
Million tonnes
•
20
15
10
5
0
2013
2014
2015
2016
2017
2018
2019
2020
OFFSETS – EARLY ACTION OFFSETS
Early Offsets
• The program allows the use of offsets from the Climate Action Reserve (CAR) for certain projects
types (remaining CRTs)
• Urban forestry – 0 tonnes
• Forestry – ~2 million tonnes
• Domestic ODS – ~1.9 million tonnes
• Livestock (Ag.) – ~292,000 tonnes
• Requirements
• Project State Date - prior to 1/1/2013
• Project Location - United States
• Eligible Credits - 1/1/2005 - 12/31/2014
• In order to be exchanged for ARB credits, the projects that earned the offset credits must be reverified or checked in some manner by an ARB-accredited verifier
• Process is still being defined, but does pose some risk on transference
• Other Potential Project Types (LFG, N2O, CMM, International ODS, etc.)
• If these projects were eventually accepted by ARB, they could allow older vintages
• For example N2O – could consider credits before they are required to capture under AB 32
(1/1/2012)
OFFSETS – POST 2012 OFFSETS
• Once the program starts, ARB will implement its General Offsets program
• Project Types – For right now, same 4 protocols are eligible with new protocols considered in
2012
• Urban forestry, Forestry, Domestic ODS, Livestock
• Start Date
• Post December 31, 2006
• Location
• Projects to be located in the United States, Canada, and Mexico.
• Eligible Offset Registries
• External registries can apply to be eligible ARB registries
• The registries can administer offset project registration, verification, etc
• Approval of an Offset Project Registry is valid for 10 years
• An approved Offset Project Registry must use the ARB-approved Compliance Offset
Protocols
PRODUCTS AND PRICING
California Carbon Allowances (CCA): AB32 Allowances for 2013 Delivery
 Auction floor price of $10
 The program must be initiated and allowances trading for product to exist
 Historical lifetime range of CCAs has been $11.50 - $24.25/ CCA
 Currently valued at $18/ CCA
California Carbon Offsets (CCO): AB32 Guaranteed Offsets for 2013 Delivery
 CCOs are offsets issued by CARB
 Falls under the 8% of allowable offset usage limit
 The program must be initiated and allowances trading for product to exist
 Currently valued at $12.00/ tonne
AB32 CAR Approved Offsets: One of the four approved CAR offset protocols
 Offsets from one of the 4 CAR protocols that approved by CARB
 Falls under the 8% offset usage limit
 These offsets bear re-verification risk by CARB
 Currently valued at $10.50/ tonne
GOING FORWARD
 Superior Court Case
• ARB is moving forward with accepting its updated CEQA analysis to fulfill the outcome of the
court case
• In the meantime, a stay is in place allowing ARB staff to continue implementation
• Offsets
• ARB has stated that they plan to issue new protocols for adoption by early 2013
• Expectation is 1-2 protocols to be adopted and it will be interesting to see which protocols are
selected with the offset supply concerns that exist by compliance entities
• Linkage with Other Programs
• The potential effect of other programs linking with AB 32 is unknown
• Quebec, Ontario and British Columbia all hope to initiate compliance in 2013 as well
• Still uncertain if other states/provinces link with California, but could have large impacts on the
market
CONCLUSION
 The implementation of a state wide cap and trade program has the potential to have significant
impacts on underlying commodities prices including natural gas and power
 Under AB32 will likely have a considerable effect on operating expenditures and business yields
 As the details of the program are still evolving it is important to be proactive and put into place
internal and external controls to mitigate the affects of this program to your organization
 In California’s current economic state and increasing regulatory environment, it is important to work
with a firm that will assist you indentifying compliance options, project investment opportunities,
energy efficiency measures, and that understands the overall costs of the program in order to enhance
value and optimize your portfolio
ELEMENT MARKETS
Randy Lack, Chief Marketing Officer
Element Markets, LLC
3555 Timmons Lane, Suite 900
Houston, TX 77027
Office: 281-207-7213
rlack@elementmarkets.com
www.elementmarkets.com