As the new year has kicked off, The Climate Trust has released its prediction list of 10 carbon market trends to watch in 2016. The trends range from climate change playing a larger role in federal decision making to increased carbon market linkage and momentum in conservation finance.
“The Trust pays close attention to market signals throughout the year, identifying areas where we can have the greatest impact,” said Sean Penrith, executive director for The Climate Trust. “Each year, we look forward to putting together our team’s collective knowledge and sharing our industry insights.”
And the top trends….
1. Carbon pricing will play a key role for many jurisdictions worldwide as they plan to meet their emission reduction targets from the Paris negotiations. Roughly one quarter of the world’s emissions now fall under some form of carbon pricing system.
2. In Oregon, policies related to clean energy will take center stage in 2016. Importers of transportation fuels will be under obligation to comply with the state’s Clean Fuels Program in 2016. This program is designed to reduce the carbon intensity of transportation fuels 10% by 2025, by integrating more low-carbon fuels (like ethanol and biogas) into the fuel supply.
3. Climate Risk Gets Real for Private Industry. Beginning with the groundswell at Climate Week in New York in September 2015, and becoming more strident at the Paris climate summit, it is clear that the era of managing and disclosing a corporation’s exposure to climate risk has arrived.
4. Addressing climate change will play a larger role in federal decision-making and political platforms in 2016. With the energy created by the COP21 gathering in Paris still buzzing around us, a presidential campaign well underway, and a little more than a year left for members of the Obama Administration to leave their full mark on history, it seems clear that 2016 will be a year of climate action.
5. Increased U.S. carbon market linkage as states prepare for the Clean Power Plan. The final draft of the Environmental Protection Agency’s (EPA) Clean Power Plan was released in 2015, with 24 states filing a lawsuit against the plan questioning EPA’s authority. The lawsuit is unlikely to succeed. In fact, many of the states involved in the lawsuit are still drafting compliance plans; 24 other states launched a countersuit in support of the Plan; and George Bush’s EPA chief reminds the states that EPA’s authority has been upheld by the Supreme Court twice before.
6. Conservation finance spurred by divest/invest movement. There has been a marked amount of movement in the finance arena. 2016 will see this turn to a flood coming out of the climate summit talks in Paris. The International Energy Agency has estimated that we need investment flows of $53T by 2035 to mitigate the projected catastrophe of runaway climate change.
7. New legislation in 2016 will extend California’s cap-and-trade system to 2030 or beyond. California’s greenhouse gas (GHG) emission reduction targets currently end in 2020. Existing legislation gives the California Air Resources Board (ARB) the authority to continue to enforce the 2020 emissions target (a return to 1990 emissions), even after 2020. However, without new legislation ARB cannot require deeper cuts beyond this 2020 target. California is working now to create new, more stringent emission reductions targets for 2030 and 2050.
8. Continued tight spread between CCAs and CCOs. The California Carbon market took a surprising turn in 2015. California Carbon Offsets, which have historically been valued at a 25-30% discount to California Carbon Allowances, shot up in the latter half of the year to a discounted value of 10-15%. A big reason behind the reduced spread was the November 2, 2015 deadline for compliance companies to surrender offsets and allowances to demonstrate compliance with the first compliance period reduction target. The big question going into 2016 is whether this tight spread will continue or dissipate, as the second compliance period surrender deadline isn’t until late 2018.
9. California will lead the way in using shorter-term Global Warming Potential values. As the effects of climate change are increasingly felt and action is demanded, there is an increased focus on “short lived climate pollutants” like methane. To compare methane to the heat-trapping ability of carbon dioxide, it is assigned a Global Warming Potential (GWP), or equivalency value for the amount of warming compared to carbon dioxide. Because methane has a short lifetime in the atmosphere and carbon dioxide has a very long one, the IPCC publishes different GWPs for different time periods. Recent data shows that over a 100-year period, methane causes 28 times as much warming as carbon dioxide. Compared over 20 years, however, methane is 84 times as potent. It is up to regulators and policy makers to decide which time period is the most appropriate to use for comparison.
10. The volume of forestry carbon offsets will continue to significantly increase in the California cap-and-trade program. Forest project offsets were the most rapidly growing project type in the CA compliance market in 2015. As of December 2015, Ozone Depleting Substances, Livestock, and Mine Methane Capture consist of 12,957,201 (or 38%) of the California Air Resources Board (ARB) offset credits issued. U.S. Forests constitute 20,933,016 (or 62%) of the issued offsets, approximately double that of all other project types combined. The Climate Trust expects this trend to continue in 2016.