CALIFORNIA’S FIRST CAP-AND-TRADE AUCTION TO BEGIN NEXT WEEK

Tamar Hallerman
GHG Monitor
11/9/12

California’s Air Resources Board will hold the state’s inaugural auction for emissions allowances next week in preparation for its cap-and-trade scheme. Electric utilities, oil refineries, steel manufacturers and other large industrial emitters will begin bidding on more than 60 million CO2 permits Nov. 14 ahead of official implementation of the state’s emissions trading scheme (ETS) on Jan. 1, 2013. With an initial floor price of $10 per credit, ARB said the first auction is expected to net more than $600 million for the state. As California further lowers the cap on emissions over the course of several years, the price of allowances could swell to as much as $50 each by the end of the decade, the Board said. At an emissions trading conference last month, air chief Mary Nichols said everything is on track for the initial auction. “Barring any unexpected glitches, the auction will go forward,” she said. The state ran a trial auction in August and all went smoothly, Nichols said at the time.

If all goes as planned, the ETS will be expanded in 2015 to include heating and transportation fuel distributors, a move that will expand the market to include 350 of the state’s largest emitters—encompassing roughly 600 facilities—and incorporating the sources of roughly 85 percent of the state’s total greenhouse gas emissions. In quarterly auctions, polluters can choose to either directly cut greenhouse gas emissions or buy credits from the state or other emitters in order to comply. It is expected to be the world’s second largest carbon market after Europe’s Emissions Trading Scheme.

Opponents Say Scheme Will Hurt State

In the months leading up to the first auction, many large emitters have aimed to either kill or minimize the burden the ETS will have on their operations. In recent weeks, many have asked the ARB to initially provide emitters with all needed credits for free as the program ramps up. Under the current setup, emitters will receive free allowances to cover 90 percent of the emissions from their facilities. Others have argued that the ETS would raise energy costs in a state where gas prices are already among the nation’s highest while further driving businesses out of state. “Focusing on achieving sizable emissions reductions from California entities through a complex market design with high administrative costs is likely to impose significant costs on the California economy with no compensating environmental or economic benefits,” two California professors and members of ARB’s emissions market assessment committee said in an op-ed published in the Sacramento Bee late last week. “Maximizing the short-term pain to the California economy with virtually no environmental gain greatly increases the likelihood of a negative demonstration effect from the program.” The pair warned of volatile carbon prices, potential litigation and market manipulation as potential negative side effects of the ETS.

Meanwhile, ARB has stood by its emissions trading scheme. “The California Air Resources Board has designed a California cap-and-trade program that is enforceable and meets the requirements of AB 32,” the Board’s website says. Next week’s auction kicks off perhaps the most publicized portion of California’s landmark climate law, AB 32. In addition to the ETS portion of AB 32, the law also mandates energy efficiency efforts, a low carbon fuels standard and the further deployment of renewables. The law has faced numerous legal and political challenges ever since it was signed by then-Gov. Arnold Schwarzenegger in 2006. It works toward the ultimate goal of cutting the state’s greenhouse gas emissions to 1990 levels by the end of the decade, roughly 17 percent below current levels.

Nichols previously said that she hopes to eventually link California’s ETS with Quebec, which is launching a similar cap-and-trade scheme next year, and indicated an openness for creating a common ETS with other markets such as those in Europe, Australia, Japan and elsewhere. California’s system is the first multi-sector cap-and-trade scheme in North America. The Regional Greenhouse Gas Initiative, which has been in operation since 2008, only covers electricity sector emissions in nine northeast states.