Implementing AB 398: ARB’s initial post-2020 market design and “allowance pool” concepts

AB 398 requires the California Air Resources Board (ARB) to make several important reforms to the cap-and-trade program’s post-2020 market design. For example, the statute requires ARB to implement a hard price ceiling at which unlimited compliance instruments will be offered for sale at a fixed price; establish two new price containment points at which limited quantities of allowances will be made available at a fixed price; and impose new limits on carbon offsets, to name only a few changes.

At a workshop earlier this month, ARB released its initial thinking on how to implement the post-2020 market design reforms required by AB 398. As a threshold matter, it is important to observe that ARB has not yet addressed two key issues on which AB 398 requires further evaluation—potential changes to banking rules and adjustments for overallocation (also known as oversupply). Both of these statutory provisions require ARB to consider the extent to which the current cap-and-trade program has too many allowances relative to near-term demand. So far, ARB has characterized lax market conditions as a success, not a liability.

We comment on ARB’s proposal and offer conceptual suggestions regarding market design and oversupply, with a goal of informing constructive discussion on these issues.

To read the full research note, please download the full PDF report.

Legend:

1. Allowance banking and auctions
2. 1/3 of pre-2020 APCR sent to price ceiling
3. 2/3 of pre-2020 APCR allowances sent to price containment points
4. Post-2020 budget carve-outs
5. Post-2020 budget carve-outs sent to two price containment points and/or ceiling
6. Two price containment points
7. Price ceiling account
8. Unlimited, non-tradable “Price Ceiling Units”

Notes:   All prices are given in units of 2015 USD, consistent with ARB’s new documents and the 2017 Scoping Plan. Figure not drawn to scale.