Washington, 19 October 2011

California’s Air Resources Board (CARB) will, on Thursday, October 20, adopt its final rules for California’s carbon market. The adoption of the cap-and-trade regulation will mark the official stamp of approval before the state’s self-imposed deadline of October 28, and will result in California’s program entering into force next year, binding emitters to carbon caps as of 2013. The move ushers in the creation of a second cap-and-trade program in North America, after the Regional Greenhouse Gas Initiative (RGGI), and of a new market a fifth the size of the EU’s Emissions Trading Scheme (EU ETS).

According to Lisa Zelljadt, Thomson Reuters’ Regional Editor for North America, “this new program will represent a big milestone in the development of carbon markets. Already significant in its anticipated size; almost 400 million tons (Mt) in 2015, the program has the potential to expand by a further 50% if it grows to include the Canadian provinces of Ontario, Quebec, British Columbia and Manitoba under the Western Climate Initiative (WCI).

Although carbon caps would not be introduced before 2013, several program elements would already begin in 2012, as CARB would begin auctioning California Carbon Allowances (CCAs) on August 15 to ensure these units are in circulation well before firms need them for compliance. The appointment of providers of essential trading infrastructure – an operator of allowance auctions and reserve sales, a provider of financial services for those sales and an independent market monitor - will be made in the next few weeks and bodes well for the market’s timely entry into force. “CCAs are already trading on a forward basis, with prices reaching almost $20/ton, higher than the price of carbon in Europe. The market is gearing up”, says Zelljadt.

Thomson Reuters forecasts prices for the California market will be $36/ton on average in 2013 – 2020. The high prices will be driven by an aggressive cap and limited offset supply. However, CARB has announced it will consider three additional offset protocol types in future rulemakings: N2O reduction from fertilizer management, fugitive emissions from oil and gas pipelines, and rice management. Should these offsets emerge, Thomson Reuters Point Carbon forecasts they could increase offset supply from 76 Mt to 104 Mt, resulting in prices of $30/ton on average in 2013- 2020, 15% lower than the current forecast.

“This is an exciting time for US carbon markets. California’s program has a lot of innovative features, covering power imports and transportation and including ambitious targets. It really sets an important pilot program that other states and provinces can learn from and may eventually decide to join,” said Zelljadt.

Ends --

Thomson Reuters Point Carbon

www.pointcarbon.com