A discussion paper released today by economists at global economic consulting firm The Brattle Group examines the trends of the California greenhouse gas (GHG) market and analyzes the underlying future drivers that will affect California GHG prices to achieve the state’s ambitious goal of 80% decarbonization by 2050.  The Brattle analysis finds that the near-term prices are likely to remain near the floor, but long-term prices will need to rise substantially unless technology breakthroughs massively decrease non-electric emissions.

California has already made substantial progress toward decarbonization. In addition, the enactment of SB32 in September 2016 firmed up the commitment to reduce carbon emissions by 40% by 2030, and the cornerstone Cap-and-Trade Program was extended to 2030 in July. The enhanced regulatory certainty helped increase GHG allowance prices to a record high of $15/ton in the most recent auction. In 2016, GHG emissions dropped by 5%, the most significant year-on-year reduction in GHG emissions since 2013. These reductions occurred in the electric sector as a result of new renewable generation, decreased imported coal generation, and high hydro output.  Transportation sector emissions slightly increased, partially offsetting the progress in the electric sector.

The Brattle discussion paper finds that over the long term, reaching California’s deep decarbonization goals may require large increases in GHG prices in the absence of technological breakthroughs. Additionally, non-electric sectors, especially transportation, must play an increasingly important role in GHG emission reductions.  The bulk of future reductions will likely be accomplished largely by complementary policies, but supplemented by price-driven reductions.  The level of complementary policies and innovation in lower-cost, clean-energy technologies in the non-electric sector will have major impacts on future GHG prices.

The potential for high future GHG prices highlights the importance of further improving the economic competitiveness of clean-energy technologies, such as bulk energy storage, and promoting more widespread adoption of electric vehicles. According to the Brattle discussion paper, despite significant projected additions of renewable generation, the electric sector is not likely to achieve full decarbonization by 2050.  Full decarbonization will likely require further development of storage technologies beyond the current mandates, expansion of CAISO market footprint, and/or increased transmission capability for imports and exports.

As the economy decarbonizes, however, the relationship between GHG prices, fossil fuel prices, and electricity prices can change significantly.  For example, the discussion paper notes that rising GHG and natural gas prices will increase California wholesale power prices over the long term, but the impact of GHG prices on wholesale power prices diminishes as the electric sector decarbonizes. Despite the diminished effect of GHG prices on wholesale power prices, however, further improving the economic competitiveness of complementary technologies, such as bulk energy storage and electric vehicles, will be essential to reduce the risk of politically untenable increases in GHG prices.

The Brattle discussion paper also notes that, given the current lack of federal support for a climate protection policy, similar approaches to GHG mitigation are being considered by other states and regions interested in pursuing policies for climate protection.  In fact, Quebec and Ontario have already joined California in the Western Climate Initiative’s (WCI’s) cap-and-trade program, and Oregon is considering an economy-wide cap-and-trade program and linkage to California as well. States and regions contemplating policies pursuing major decarbonization should consider the way that complementary policies, GHG prices, and customer adoption of clean-energy technologies will interact using the California experience as a starting point for developing their own programs.

“Our analysis shows that the interaction of price and non-price mechanisms will be an important consideration for planners in other regions as they evaluate their own solutions,” notes Metin Celebi, a Brattle principal and co-author of the discussion paper. “The GHG price is a critical input to generator dispatch decisions in power markets and drives generator profit margins and investments. System planners have to make strategic decisions based on the long-term expected effects of a full suite of policies.”

The discussion paper, “The Future of Cap-and-Trade Program in California: Will Low GHG Prices Last Forever?,” is authored by Brattle Senior Associate Yingxia Yang, Associate Michael Hagerty, Senior Research Analyst Ashley Palmarozzo, Research Analyst Hannah Sheffield, and Principals Metin Celebi and Marc Chupka. It is available for download below.

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