The Air Resources Board (ARB) has come out with data on emissions for 2012 that reinforce some estimates of the California emissions market being long and explain in part why California allowances are still trading near or at the floor auction price. 

 To understand this, let’s turn to the 2011 data.  ARB calculated that cover emissions in 2011 were 403 million tons and non-covered 27 million tons of CO2e (by covered emissions, ARB means the emissions that would fall under compliance starting in 2015 when transport fuels and natural gas supplies are covered).   For 2012,  ARB is reporting total covered emissions are 354 million tons and non covered is 84 million tons --  a 49 million ton fall in covered emissions from 2011!

 

2011

2012

 Δ 2012-2011

Total Covered Emissions

 402,636,291

 353,821,695

(48,814,596)

Total Non-Covered Emissions

 26,651,156

 84,020,457

 57,369,301

   Aggregate Emissions

 429,287,447

 437,842,152

  8,554,705

 If we put our tongue deep in our cheek, we may like to say that through extraordinary efforts of greening of covered industries, California emissions fell despite economic growth recovering from the recession.  But the truth is more in the data reporting.

 To find the discrepancy, one has to go deep into the excel sheet on facility by facility data and compare the two years’ emissions.  What is found is that the attribution of emissions has changed with gas suppliers reducing their emissions (eg South  California gas falling from 47 million tons in 2011 to 23 million tons in 2012; PG&E supplier of natural gas declining from 39 to 19 million tons) and pushing  the remaining emissions into the non-covered emissions.  But those emissions are not truly non-covered in an aggregate sense – only that facility is not responsible for those emissions.  The responsible facility is the users of that natural gas eg refiners etc.   When the covered emissions are added up for 2012, there should not be much change in the aggregate covered emissions with some facilities taking on addition compliance amounts and others (the natural gas suppliers taking on less).  But instead covered emissions as reported falls by 48 million tons – a hard to believe decline in one year, especially considering that the California economy was recovering.

 So what is wrong?  It is hard to tell without more detailed data.  But here are two explanations with dramatically different impact on the market.

 First, is that the 2012 data is correct and the 2011 is wrong.  Essentially ARB could have double counted emissions in 2011.  For example, the 47 million tons of Southern Cal emissions included all the emissions from the sales of natural gas while the users such as refiners also counted these emissions.   Discovering this error, the data was corrected in 2012, knocking down covered emissions. If so then the 2012 data is correct and actual covered emissions are only 353 million tons driving the market to be long.  In such a long market, the California ETS would essentially be a tax at the minimum auction price, today under $11 per allowance ton and increasing at 5% real per year.

 Second, and alternatively, the data are still in error.  While natural gas suppliers have reduced their covered emissions in 2012, not all the users of natural gas have increased their reported emissions as they are still assuming that those emissions should be covered by the natural gas suppliers.  That is aggregate covered emissions are still over 400 million tons.

 What is suspicious about the first scenario of data double counting is that in all the reporting and estimates of emissions for California up until now never has such a low number been reported.  It is way off the historical record.  Since 2000, GHG emissions in California have ranged from 480 to 420 million tons with a significant fall during the recession.  While some of these emissions would not be covered by the ETS, the bulk of them are under the cap and trade.

 ROI stands more behind the second explanation with covered emissions still closer to the 400 million ton mark.  The non-covered emissions reported in the 2012 data are in the aggregate in error.  While some double counting exists, it is not at the 50 million ton level.  That is, covered emissions are still in the 400 million ton plus range (aggregate covered emissions closer to 437 million tons).

 ROI will soon be posting our demand/emission projections for 2014 to 2020 so stay plugged in  – in the mean time, don’t get too excited about how green California is becoming and be cautious on jumping to the conclusion that the market is long. 

 The link for the detail ARB data is:  (www.arb.ca.gov/cc/reporting/ghg-rep/.../2012-ghg-emissions-data.xlsx).