isramart analysis: US carbon market worth $60bn in first year: CBO

Isramart Analysis

A carbon market created by the Waxman-Markey bill could be worth $60 billion in 2012.

The projection was made by the Congressional Budget Office (CBO) in a report issued Friday, which estimated the cost associated with the energy and climate change bill that was reported out of the House energy committee last month.

The report said the market would be “large and liquid,” and allowances could easily be traded for cash.

The Waxman-Markey bill proposes a multi-sector emissions trading scheme to help cut emissions 17 per cent below 2005 levels by 2020.

The CBO estimated 7,400 facilities would be affected by the scheme and would be required to submit allowances for their emissions.

The programme would cover about 72 per cent of US emissions of GHGs in 2012, about 78 per cent in 2015, and about 86 per cent in 2020, the report found.

Producers and importers of industrial gases known as HFCs would fall under a separate cap starting 2012, and would be required to turn in allowances for the tonnes of carbon dioxide equivalent they produce or import.

Allowance price estimate

Starting in 2011, allowances would rise from $15 in value to around $26 in 2019, the CBO estimated.

Separate allowances for HFCs, in contrast, would rise from $2 in 2012 to $20 in 2020.

The amount of offsets available for use by facilities facing caps will also have a significant effect on allowance prices, the CBO said.

“By reducing the cost of complying with the cap, offsets are likely to lower the price of allowances by a substantial amount,” according to the report.

To help meet caps, companies are allowed to use up to 1 billion carbon offsets from domestic emission reduction projects and a further 1 billion from abroad.

The use of both domestic and international offsets would decrease the price of emission allowances by $35 – or 69 per cent – in 2012.

Offset supply

The report predicted that facilities would use domestic offsets to substitute around 230 million allowances in 2012 and 300 million in 2020.

If the supply of domestic offsets is not ample, which many market participants are anticipating, covered entities would be allowed to use international offsets to cover up to 1.5 billion allowances.

CBO estimates that firms would use international offsets in lieu of 190 million allowances in 2012 and up to 425 million allowances in 2020.

Though the Waxman-Markey bill also allows the use of allowances from emissions trading systems overseas of “comparable stringency,” the bill provision would have no effect on US allowances, since they would likely have similar carbon prices.

Budget impact

The CBO found that the bill would help reduce the US budget deficit, raising $846 billion by 2012.

Under a US cap-and-trade system, federal spending would also increase by about $821 billion between 2010 and 2019.

“In total, those changes would reduce budget deficits (or increase future surpluses) by about $24 billion over the 2010-2019 period,” the report said.

The CBO also estimated that the bill would increase discretionary spending by about $50 billion by 2019, most of which would stem from spending proceeds from emission allowance auctions from various funds established under the legislation.

The CBO is the primary congressional agency charged with reviewing legislative initiatives with budgetary implications.

The House energy committee is meeting Tuesday to discuss allowance allocation under the Waxman-Markey bill.