The University of California Energy Institute set up a market simulation group to look at potential sources of disruption for the fledgling California cap-and-trade system and suggests some changes could prevent future problems.
According to a just-released report form the simulation group, the chance of market manipulation can be minimized through some tweaks to the cap-and-trade system. The report was posted recently on the California Air Resources Board (CARB) website.
“Our concern here is market manipulation or withholding, not speculation. A speculator buys allowances as a bet that the price will rise, but has no direct ability or intent to influence that price. We do not consider that to be troublesome or undesirable behavior.”
The report was drafted by Severin Borenstein, James Bushnell, Frank A. Wolak, and Matthew Zaragoza-Watkins. The first three are professors at California universities and Zaragoza-Watkins is a Ph.D. candidate at UC-Berkeley.
California’s cap- and-trade market in greenhouse gases (GHG) is now in its third calendar year, with the first allowance auction taking place on Nov. 14, 2012 and compliance obligations commencing on Jan. 1, 2013.
To date the market prices have held at or near the lower bound “floor” prices established by the allowance auction reserve price. But the market is entering an important new phase in the next 18 months.
The 130-page report says the first firm information on covered emissions during the first compliance period will emerge in November of this year. Starting in 2015, the market will expand to include several new sectors, including transportation fuel and most natural gas consumption in the state.
California’s price collars were developed by CARB. A second key consideration is whether some market participants might be able to strategically change the allowance price – in particular by buying more allowances than they need and withholding them from the market.
“Under most scenarios, the most likely 2020 market price will be very close to the auction reserve price floor,” according to the report. “However, under all scenarios, there is a smaller but significant risk that the allowance price containment reserve will be exhausted at or before 2020.”
The report provides several recommendations to reduce the risk of “very high allowance prices due to either the competitive supply/demand balance or a withholding strategy.”
The study looks at likely emissions under business as usual and other scenarios. The study also tries to the impact of imported electricity and other factors. The document also notes that California has set a 33% renewable energy target for the RPS by 2020.