CAP CAP Carbon Markets & Trading 2 — Questions and Answers
Question 1: What California law established the state's Cap-and-Trade Program?
- The Clean Air Act
- AB 32 (Global Warming Solutions Act of 2006) (Correct answer)
- The Kyoto Protocol
- Executive Order 13514
Correct answer: AB 32 (Global Warming Solutions Act of 2006)
California's Cap-and-Trade Program was established under AB 32, the Global Warming Solutions Act of 2006, which set the state's 2020 GHG reduction target.
Question 2: In carbon markets, what does 'leakage' refer to?
- Greenhouse gases physically escaping from a geological storage facility
- The increase in emissions outside a regulated area caused by carbon pricing policies within it (Correct answer)
- The loss of carbon credits due to registry data errors
- Methane releases from natural gas distribution pipelines
Correct answer: The increase in emissions outside a regulated area caused by carbon pricing policies within it
Carbon market leakage occurs when emission-reduction policies shift production to unregulated regions, potentially offsetting global emission gains.
Question 3: What is a Renewable Energy Certificate (REC)?
- A certification for carbon auditors specializing in renewable energy systems
- A tradeable instrument representing the environmental attributes of one MWh of renewable electricity generation (Correct answer)
- A government license required to construct renewable energy facilities
- A tax credit for purchasing plug-in electric vehicles
Correct answer: A tradeable instrument representing the environmental attributes of one MWh of renewable electricity generation
A REC represents the environmental attributes of one megawatt-hour of renewable electricity and can be sold separately from the physical electricity.
Question 4: Which of the following best describes a 'price floor' in a carbon allowance market?
- The lowest international price at which offsets can be sold on voluntary markets
- A minimum auction reserve price set to prevent carbon allowance prices from collapsing (Correct answer)
- The base carbon tax rate before sector-specific adjustments
- The minimum cost charged by third-party carbon offset verifiers
Correct answer: A minimum auction reserve price set to prevent carbon allowance prices from collapsing
A price floor is a minimum reserve price in cap-and-trade auctions designed to provide market stability and encourage long-term investment in low-carbon technology.
Question 5: What is 'double counting' in carbon markets?
- Recording a project's emissions in two separate inventory periods
- When the same emissions reduction is claimed by more than one party toward their climate targets (Correct answer)
- Auditing a carbon offset project twice during the verification cycle
- Adding Scope 1 and Scope 2 emissions together to calculate a total
Correct answer: When the same emissions reduction is claimed by more than one party toward their climate targets
Double counting occurs when the same GHG emission reduction is counted toward more than one entity's climate target, undermining the environmental integrity of the market.
Question 6: What is the key distinction between compliance and voluntary carbon markets?
- Compliance markets are for developing countries; voluntary markets are for developed countries
- Compliance markets are legally mandated for regulated entities; voluntary markets allow companies to purchase offsets by choice (Correct answer)
- Compliance markets apply only to Scope 1 emissions; voluntary markets cover Scope 3
- Compliance markets always have lower credit prices than voluntary markets
Correct answer: Compliance markets are legally mandated for regulated entities; voluntary markets allow companies to purchase offsets by choice
Compliance carbon markets are legally required under regulation (e.g., RGGI, California Cap-and-Trade), while voluntary markets allow organizations to offset emissions at their own discretion.
CAP CAP Carbon Markets & Trading 2
What California law established the state's Cap-and-Trade Program?