US emission trading scheme gears up for transportation cap

The Western Climate Initiative cap-and-trade scheme has taken what analysts described as an unprecedented step in outlining plans to impose carbon caps on the transport sector.

The nascent initiative unveiled the move as part of its new design recommendations for its regional greenhouse gas cap-and-trade plan, which is to cover seven western US states and four Canadian provinces.

Under the new proposals, the scheme will impose a cap on carbon used in the transportation industry by applying it indirectly to upstream fuel production at the point where it enters the commercial sector.

The only other cap-and-trade initative to include some areas of the transportation sector is the EU's emissions trading scheme, which is proposing incorporating aviation in the scheme, but even that has stopped short of including road transport.

"Including the transportation sector is unprecedented," said Emilie Mazzacurati, senior analyst with carbon trading market analyst Point Carbon. "It is necessary in the states involved, because about 40 per cent of emissions come from cars and trucks."

Mazzacurati suggested that oil companies would react to the move by simply passing the extra cost onto the consumer.

Eileen Wenger Tutt, deputy secretary for the Californian Environmental Protection Agency, confirmed that Exxon Mobil had responded to the proposal by requesting an explicit tax on gasoline.

"The oil industry will be split, but in general I would suggest that they won't appreciate the recommendation that we made," she said, adding that the price of gasoline would go up at the pump.

Wenger Tutt denied that the cap on carbon emissions from upstream fuel amounted to a carbon tax. The WCI simply established ground rules and left it up to the free market to work out the details, she protested.

The WCI will also take stronger measures than the Regional Greenhouse Gas Initiative (RRGI) to maintain the value of its carbon credits.

A reserve price will be imposed on the credits that will be auctioned off as part of the scheme, and Wegner Tutt estimated that the price would be higher than the RGGI's $1.82 per tonne, largely because the WCI trades carbon across multiple sectors, while the RGGI cap only affects utilities.

Roughly 600-700 million metric tonnes will be traded under the WCI scheme, which comes into effect in 2012. The transportation part of the cap and trade scheme will not be introduced until 2015.

Meanwhile, the RGGI scheme, which covers 10 north eastern states including New York, New Jersey and Massachusetts, undertook its first auction of carbon credits last week, raising almost $40m.

Energy, financial and environmental organisations paid around 65 per cent more than the minimum set price with credits trading at $3.07 per tonne.

The $38.5 million raised through the auction will be distributed to Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont. The states plan to invest the revenue in a range of green-energy projects and initiatives to alleviate the impact of higher utility bills on customers.

Adam Nathan of the Carbon Markets and Investors Association (CMIA) welcomed the first auction as a clear step forward towards the creation of a US-wide carbon market.

"We see it as important progress towards introducing the reality of a carbon price for parts of US business," he said, adding that the relatively low price for a tonne of carbon should not be a cause for too great a concern.

"In terms of the low pricing for this round of auctioning, it should be remembered that this is the first auction and it is relatively small - 12.5 mt out of 188 mt annually - and that several large states will be auctioning in December," he explained. "It is [also] worth emphasising that generators do not have to surrender allowances until the end of the control period - early 2012 - so there was no reason for them to "rush" into this first auction."