Holding limits under the California cap-and-trade

 

The rules on holding limits have been substantially modified in the California scheme as from 1 September 2012. The holding limit legal regime effective from the said date briefly can be summarised as follows.

 

 

The notion of the holding limit under the California cap-and-trade

 

The holding limit is the maximum number of California GHG allowances that may be held by an entity or jointly held by a group of entities with a direct corporate association at any point in time.

 

Holding limit entities coverage

 

The holding limit applies to each entity registered under the program as a covered, opt-in covered, or voluntarily associated entity, however, the respective thresholds differ.

 

Holding limit calculation

 

It should be noted that the holding limit calculation does not include allowances contained in limited use holding accounts.

 

The holding limits are currently calculated separately for each vintage year.

 

Holding limit is based on the following formula:

Holding limit = 0.1*Base + 0.025*(Annual Allowance Budget – Base)

 

where

“Base” equals 25 million metric tons of CO2e

“Annual Allowance Budget” is the number of allowances issued for the current budget year.

 

For the 2013 the annual budget is 162,800,000 allowances.

 

Thus holding limit = 0.1 * 25,000,000 + 0.025*(162,800,000-25,000,000)

 

In effect 2013 holding limit elaborated according to the above formula amounts to 5,945,000 allowances

 

Limited exemption to the holding limit

 

Each covered entity may exclude a limited number of allowances from the holding limit calculation by placing them in its compliance account.

 

The limited exemption is a cumulative calculation of an entity’s compliance obligations less the number of instruments it surrenders. The limited exemption is increased each year by the amount of the entity’s emissions report. It is decreased at the end of the year following the close of a compliance period, after the entity has completed its triennial surrender, by the entity’s total surrender obligation for the compliance period.

 

It is noteworthy that allowances won in an auction may be transferred to an entity’s holding account or its compliance account as needed to facilitate compliance with the holding limit.

 

Example: determining holding limit

 

Holding limit = 5,945,000 + [limited exemption - allowances in the compliance account]

 

If an entity’s limited exemption is equal to 4,000,000 metric tons and it holds 1,000,000 allowances in its compliance account:

Holding limit = 5,945,000 + [4,000,000 – 1,000,000] = 8,945,000 allowances.

 

If an entity’s compliance account balance is 4,500,000 allowances:

 

Holding Limit = 5,945,000 + [4,000,000 – 4,500,000] = 5,445,000 (the source of examples: Auction Notice, California Cap-and-Trade Program Greenhouse Gas Allowance Auction on November 14, 2012, issued on September 14, 2012, Attachment B, www.arb.ca.gov).

From a covered entity perspective it is useful to know that in the case of emissions increase it is possible to apply for the extension of the said exemption. Prior to October 1 of any year, a covered entity may submit to the Executive Officer evidence demonstrating an increase in

emissions for that year over the previous year and request a temporary increase in the limited exemption until verified data for that year are available. The amount of the increase, however, must be at least 250,000 metric tons CO2e on an annualized basis.

 

The provisions stipulate that the ARB will review the evidence and determine whether an adjustment is needed. If an adjustment is granted, then the limited exemption for that covered entity will be increased immediately by the amount determined by the ARB. When the verified emissions data are received for the year for which an adjustment was granted, the ARB will use the verified emissions value when calculating the limited exemption.

 

Application of the corporate association disclosure to the holding limit

 

The total number of allowances held by a group of entities with a direct corporate association  in their holding accounts must sum to less than or equal to the holding limits.

 

Entities that are part of a direct corporate association that choose to opt out of account consolidation must allocate shares of the holding limit among themselves. This holding limit allocation results in each entity having a specified percentage share of the group’s holding limit. The sum of the shares allocated among the entities must sum to one.

 

The primary account representatives or alternate account representatives of each of the associated entities must inform the accounts administrator of the allocation of the holding limit when registering.

 

The holding limit allocation will remain in effect until the primary account representatives or alternate account representatives of each of the associated entities informs the accounts administrator of subsequent changes to the allocation of the holding limit.

 

The effects of the holding limit violations

 

If the transfer request not yet recorded into the tracking system would result in an entity’s holdings exceeding the applicable holding limit it generally should not be approved.

 

Technically, the California Air Resources Board will transmit a file to the Auction Administrator prior to the auction that contains the holding limit cap and purchase limit cap for each auction participant. These caps will indicate how many allowances an auction participant may acquire before exceeding their purchase limit and holding limit. The holding limit cap will be based on the account balances and limited exemption data available in the Compliance Instrument Tracking System Service (CITSS) at approximately 12:00 PM PT the day prior to the auction.

 

If, however, the violation is not discovered until after a transfer request is recorded, or the holding limit is exceeded at the beginning of a compliance year when allowances purchased at advance auction now fall under the current vintage holding limit, then:

- the accounts administrator will inform the violator; and

- the violator will have five business days to bring its account balances within the holding limit.

 

After that, allowances in excess of the holding limit may be transferred to the auction holding account for consignment to auction.

 

The above notwithstanding, penalties may be applied whenever the holding limit is exceeded or transfer requests are filed with the accounts administrator that would violate the holding limit.

 

Holding limit controversies

 

The introduction of holding limits in the California cap-and-trade has met criticism on the part of carbon market. The arguments were formulated that holding limits are difficult to effectively enforce and can impede the proper functioning of a cap-and-trade program, particularly in the early years of the program when liquidity is most needed. The unprecedented character of the measure, which does not exist in any other major carbon or commodities market was also raised (click here to find out about the Australian approach for position limits).

 

As allowances in compliance accounts cannot be withdrawn by their account holders, the rule in question will result in a number of allowances being taken out of the market early. This can endanger liquidity and increase the ability of any player to manipulate markets.

 

It was also indicated that the rules at issue were conceptually developed by the U.S. Commodities Futures Trading Commission for different than carbon allowances purposes – i.e. limiting financial exposure in futures commodities markets.

 

Will see how the provisions on holding limits will influence on the behaviour of market players in practice and whether carbon market implementing this infrastructure will achieve better results than its competitors.

 


Last Updated on Saturday, 22 September 2012 11:00
 

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