Opinion: Point Carbon: credits to average US$26/t in early years of US ETS

Point Carbon Research projects that the price for each metric tonne of carbon dioxide equivalent (CO2e) would average US$26 over the period 2013-2020 under a federal cap-and-trade system as outlined in the American Power Act (APA). The price projection comes after Point Carbon’s preliminary analysis of the APA discussion draft made public on May 12, 2010.

The APA would create a hybrid system to curtail greenhouse gases in the US with the electric power, industrial and commercial sectors participating in a cap-and-trade programme while the transportation sector, chiefly the petroleum industry, would pay a quarterly fee pegged to market prices for allowances.

In a US Emissions Trading System (US ETS) as outlined by the APA, the volume of allowances capped would be 2.5bnst of CO2e in 2013 when only the power sector is covered, increasing to approximately 4bnst in 2016. According to Point Carbon’s allowance price projections, the market would be worth US$350bn in 2020. The APA incorporates a “price collar,” which would rein in prices. Point Carbon finds allowances would cost considerably more if the price was determined purely by supply and demand, particularly after the industrial sector enters the system in 2016.

“The new cost containment provisions in the bill succeed in constraining prices within the $12 to $25 price range. This price collar increases over time, but it still brings our price forecast down $5 a ton compared to our last estimates, which did not include this new feature,” said Emilie Mazzacurati, Head of Point Carbon Research’s North American division. “This large allowance reserve could be tapped on as early as 2018 if emitters choose to rely on the federal government to keep prices in check rather than bank themselves,” she added, “it would really change market dynamics and risk hedging behaviour.”

To address emissions from the transportation sector, petroleum refineries are responsible for passing on the cost of allowances on to consumers, the “real” emitters, at the gas pump. This would result in an average increase of less than a quarter per gallon of gasoline based on Point Carbon’s price forecast.
Like previous climate and energy proposals, the Kerry-Lieberman draft includes several provisions to reduce the impact of energy price fluctuations on the American consumer. Two-thirds of the proceeds from the sale of emission allowances go directly to consumers and manufacturers, according to Point Carbon’s estimates. This increased emphasis on consumers comes at a cost, however, with reduced subsidies for clean energy, energy efficiency and Reduced Emissions from Deforestation and Forest Degradation (REDD).