British Columbia Moves Toward Cap-and-Trade Amid Larger Auction Debates
British Columbia is moving forward with a cap-and-trade system to reduce greenhouse gases, laying the groundwork for the province's involvement in a Western North American regional trading system.
The development occurs as one new report strikes a cautionary note about how to establish a market, warning that free allocation of emissions credits has helped produce large windfall profits in Europe (see full document here). But the Western Climate Initiative, the regional system to which British Columbia and a number of states belong, is contemplating at least a partial sale of credits (see text here).
British Columbia officials recently announced the introduction of the Greenhouse Gas Reduction Act, also known as the Cap and Trade Act. They said it would put British Columbia out front of other Canadian provinces as it prepares for the onset of the new trading system (see press statement here, see text of legislation here).
“The Cap and Trade Act will make British Columbia the first Canadian province to introduce legislation authorizing hard caps on greenhouse gas emissions,” said Environment Minister Barry Penner (pictured) in a statement. A “hard” cap means that each emitter will face a set target, regardless of the growth of its operations, according to a report in the Canadian newspaper the Globe and Mail (see story here).
One expert quoted by the paper said no one in North America has done what the province is proposing. Officials from the petroleum production industry and elsewhere also expressed some concerns about the measure and how it might mesh with regulations set by other provinces and the nation’s government, as well as the province’s own newly introduced carbon tax.
In general under a cap and trade system, credits or allowances represent the right to emit a certain amount of greenhouse gases. A debate has long been raging over whether at the beginning of the trading system to sell or give away the credits.
The British Columbia law would establish a cap for designated large sources of gases by issuing a limited number of what officials call “tradable compliance units” or emissions allowances for a given period of time. The emitters will then have to obtain units equivalent to the amount of greenhouse gases they emit within the specified time period. The units would then have to be surrendered to the government as proof of compliance.
The act identified three types of compliance units, including allowance units issued by the government; emissions reduction credits, which are offset credits from approved emission reduction or removal projects in the province, and recognized compliance units from other cap and trade systems, such as the Western Climate Initiative. Each unit would equal a ton of carbon dioxide or its equivalent.
Kate Thompson, a spokeswoman for the province's Ministry of Environment, told Climate Law Update that the legislation was silent on whether the emissions allowances would be auctioned or handed out for free. "That hasn't been decided yet," she said.
She said the legislation would likely progress through the provincial Parliament by May.
The Western Climate Initiative, which British Columbia joined last year, is considering a recommendation from a subcommittee that would require all of the partnership's participants to auction between 25 percent and 75 percent of their allowances, with the final figure not yet determined. Officials of the initiative are accepting public comments on the recommendation until April 16.
Under the April 2 proposal, the allowances would be sold through a coordinated process, with each of the states and provinces auctioning its allowances throughout the Western Climate Initiative region. Proceeds would go to the partners in the initiative, which include British Columbia and its sister province Manitoba, as well as the U.S. states of California, Oregon, Washington, New Mexico, Arizona, Utah and Montana. The initiative is expected to have its market system developed by August (see WCI document repository here).
Those hoping for an auction system would seem to have gotten some ammunition in the pages of the newest report on the subject, prepared for the environmental group WWF (also known as the World Wildlife Fund for Nature) by the market analysis firm Point Carbon. The report, which looked at the trading system set up in Europe, estimated that windfall profits for electricity generators in five countries between 2008 and 2012 could hit 71 billion Euros, or $111 billion.
According to the report:
"Windfall profits are highest in countries that have a high level of pass-through of [carbon dioxide] costs into wholesale power prices, countries with emissions intensive (coal) plant setting the price the majority of the time, and countries that allocate the highest percentage of free allowances to the power sector."
An official of the WWF called the findings "a stark warning to the rest of the world on the danger of free allocations of pollution permits (see WWF statement here)."
The report said that when the European Union set up the system it allowed most of the allowances to be distributed free of charge, as a way of providing a "soft landing" to companies faced with having to deal with an emissions trading system for the first time. In addition, the study noted that in the first phase of the system starting in 2005 more allowances were handed out than required because the allocations were based on estimates rather than measured emissions.
Other jurisdictions are also dealing with the thorny issue of whether to charge for the allowances when they are initially distributed. California utility and energy officials recently adopted a recommendation to the California Air Resources Board that included advocating at least a partial auction of allowances. But it left for later critical details, such as what percentages should be sold or handed out for free (see Climate Law Update story here).
(Photo of B.C. Environment Minister Barry Penner via Legislative Assembly of British Columbia)
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