Cap and Trade, RINs, and the Risks of the Future

by Mike Newman (Parhelion Underwriting/Biofuels Digest) The best climate policy – environmentally and economically – limits emissions and puts a price on them. Cap and trade is one way to do both. It’s a system designed to reduce pollution in our atmosphere. The cap on greenhouse gas emissions that drive global warming is a firm limit on pollution. The cap gets stricter over time. The trade part is a market for companies to buy and sell allowances that let them emit only a certain amount, as supply and demand set the price. Trading gives companies an incentive to save money by cutting emissions in the most cost-effective ways. Companies that cut their pollution faster can sell allowances to companies that pollute more, or “bank” them for future use. This market – the “trade” part of cap and trade – gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation.

Trading in the climate finance market – the systems designed to reduce greenhouse gas emissions – sometimes create areas of uncertainty. The risk of invalidation of credits worry market participants – but insurance risk capital can be used to mitigate these concerns and in fact already works successfully in several markets.

Starting in January, similar insurance coverage is offered to RIN buyers and sellers.

While EPA has attempted to address the issue of bogus RINs in 2014 when it established its Quality Assurance Program (QAP), which allows for third-party validation of credits, the market use of the program has been limited, because the process can be expensive and because it does not fully remove the risk.

In addition, insurance for California’s Low Carbon Fuel Standard (LCFS) program can also be purchased, although the extent of liability for invalidated credits is still “fuzzy.” READ MORE

Excerpt from Politico's Morning Energy: COURT BACKS CALIFORNIA ON CAP-AND-TRADE: A federal judge on Friday handed California a complete victory after rejecting the last of the Trump administration's constitutional challenges to the state's cap-and-trade linkage with Quebec, Pro's Alex Guillén reports.

Judge William Shubb of the U.S. District Court for the Eastern District of California ruled that the pollution allowance system that connected California and Quebec does not intrude on the federal government's constitutional powers to conduct foreign affairs. He rejected the administration's primary argument that the program would hamper Trump's stated goal of negotiating a "better deal" after withdrawing from the Paris climate agreement. READ MORE