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Structural oversupply and credibility in California’s carbon market

Jun 24, 2016

Beginning in early 2016, California’s carbon market began to change. For the first time since the market’s launch, the Q1 2016 auction in February failed to sell out of all available current year allowances, although 95% of available allowances were purchased. Since then, secondary market prices fell below the auction price floor. More dramatically yet, the Q2 2016 auction sold only 10% of available allowances.

California’s carbon market entered a new and volatile phase in early 2016, as indicated by two important observations: (1) quarterly allowance auctions are no longer selling all available current year allowances, and (2) secondary market prices have fallen below the auction price floor. Both features suggest that market participants perceive an oversupply of compliance instruments relative to policy expectations.

Recent events indicate that the stability of the market—and the revenue it was expected to generate—is no longer assured, especially without a credible plan for the market’s post-2020 future. Here, we review the recent performance of the market during a period of rapid transformation that has critical implications for the future of state energy and climate policy.

published in The Electricity Journal

Danny Cullenward *† and Andy Coghlan §‡

* Near Zero

† Carnegie Institution for Science, Department of Global Ecology

§ Berkeley Law, University of California, Berkeley

‡ University of California, Berkeley, Goldman School of Public Policy

photo credit: Mike Wilson