Barclays Capital announced today the first forward trade of Carbon Allowances created under California's Cap-and-Trade program, the California Climate Solutions Act (also known as Assembly Bill 32 or AB 32).
Under the terms of the groundbreaking trade, California Carbon Allowances (CCAs) guaranteed to be usable for compliance under AB 32 will be delivered in December 2012.
The CCA trade was documented under the Barclays Capital Carbon Allowance Forward Trade Agreement (CAFTA), developed in partnership with NRG Power Marketing, a subsidiary of NRG Energy, Inc. (NYSE:NRG - News).
The CAFTA provides the industry's first standardized set of terms and conditions for the forward sale and purchase of CCAs. "Our transaction structure and trade documentation fully conform with industry standards and is executable under existing ISDA and EEI agreements," said Kedin Kilgore, Head of US Emissions Trading for Barclays Capital.
"Lower transaction costs and market efficiency are the best tools for managing carbon risk under California's new regulatory requirements," said Brannen McElmurray, Director of Environmental Commodities at NRG. "Robust carbon markets will help pave the way for investment in new clean technologies."
"We are extremely pleased to have been able to transact this historic first trade in the California Carbon Market," said Louis Redshaw, Head of Environmental Markets at Barclays Capital. "Early standardization of trading contracts is essential for reliable markets. We look forward to developing an efficient, deep and competitive CCA market with other interested parties, and this trade and documentation are the first steps toward that goal."
The CAFTA takes into account the uncertainty surrounding AB 32 implementation, allowing for eventual changes without compromising guaranteed forward delivery of compliance CCA volume, price and counterparty obligations. Barclays Capital has made the CAFTA available for immediate release to qualified counterparties, in the interest of supporting a liquid and reliable market for carbon. Guaranteed carbon pricing will facilitate risk management, where none existed before, for companies exposed to AB 32.
The law firm of McDermott Will & Emery served as advisor to the CAFTA team. McDermott maintains a leading energy and commodities practice with more than 70 lawyers and other professionals who represent US and international clients in the energy and commodities industry.
Barclays Capital previously launched master trading agreements similar to the CAFTA in Europe for the OTC trading of Certified Emission Reductions (CERs). The Barclays Capital Standardized Certified Emission Reduction Forward Agreement (SCERFA), launched in October 2006, permitted early risk management and trading ahead of full development of market infrastructure. The current exchange listed CER contracts all have their origins in the SCERFA.
About the California Climate Solutions Act (AB 32)
Assembly Bill 32 was passed in 2006 by the California state congress. It seeks to reduce carbon dioxide emissions to 334 million tons per year by 2020. This will be done in equal sized reductions per year from 2012-2020. These reductions will be achieved through a cap-and-trade program in which the state will distribute allowances (either through auction or allocation) and entities can buy and sell their allowances. At the end of each annual compliance period (calendar year) the compliance entities must surrender allowances equal to the amount of carbon dioxide their facilities emitted. One allowance is equal to one metric ton of carbon emitted. From 2012-2014, the program will cover the power sector and the industrial sector. Starting in 2015, the program will also include the fuel sector (residential, commercial, and transportation).