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Greenhouse gas battle could reap billions in auctions

As California’s attempt to curb climate-changing greenhouse gases ramps up, critical pieces of the landmark law remain uncertain, including the impact of the all-important auctions of hundreds of millions of so-called “emission allowances” that will serve as the spur for utilities, refiners and others to comply.

Over the next eight years, the quarterly auctions by some estimates are projected to raise between $8 billion and $41 billion, with the money going to everything from helping balancing the state budget to promoting the virtues of clean energy to giving breaks to millions of residential and commercial electricity customers.

In this electronic auction, bids may be submitted weeks in advance and estimates vary dramatically as to how much will be raised.

“We estimate that in the first year we’ll see somewhere on the order of $550 million, maybe as high as $900 million,” said Air Resources Board’s Dave Clegern. “Our projections are pretty conservative,” he added.

The one-ton emission allowances – they are sort of like permission slips to put carbon emissions into the air — could go for $10 to $13 each, Clegern said, noting that is difficult to pin down the allowances’ value until the sales actually take place. Currently, in the futures’ market an emission allowance is worth about $20. Other estimates have put the per-allowance price tag at up to $80 each.

The auctions are a critical part of California’s “cap-and-trade” plan to cut greenhouse gases – using market-based measures as opposed to direct orders from regulators to throttle emissions.

“The auction itself is quite important,” says Bernadette del Chiaro of Environment California. “It’s important because if you are going to allow polluters to pollute, they should be allowed to pay for it.”

For California, this is a leap into the unknown: No state has ever tried anything like this, although a regional system, targeting electricity only, exists in the northeast. So the nation is watching. So is Europe, where a similar system already exists.

A review by the Legislative Analyst’s Office suggests that the proceeds from auctioned allowances could reach $14 billion within the next few years, then taper back and level off at about $12 billion annually as the program proceeds. The low end over the same period ranged from less than half-a-billion dollars to about $2 billion. The governor’s 2012-13 budget assumes $1 billion from the program, with about half going to cover shortages in the General Fund and the remainder for several clean-energy and environmental programs.

So what is an allowance worth? At least $10, by most estimates.

“Ten dollars for a ton of air pollution is pretty cheap. It should be more expensive for the oil industry to pollute our air,” del Chiaro said.

But some allowances – perhaps half of all those available — will be given away, at least temporarily, based on a specific emitter’s efficiency.

In total, between 2012 and 2020, the ARB will make available up to 2.5 billion allowances, with roughly 50 percent auctioned and 50 percent given away for free, according to an LAO analysis. The use of free allowances is seen as a way of preventing so-called “leakage” – the departure of companies to other states.

It also is a way to ease the impacts on the public.

For example, electricity generators will get free allowances to minimize the impact on ratepayers, both residential and commercial. As the auctions produce fees for the state, the hope is that some of that money will go to ratepayers – a move that will be defined by the state Public Utilities Commission.

“The big piece left hanging out there is the municipal utilities, which are not regulated by the PUC,” said Lenny Goldberg of The Utility Reform Network, which lobbies the PUC on behalf of ratepayers, “and which are controlled and governed by their local city councils.”

The Air Resources Board says the new cap-and-trade regulation, which covered some 360 businesses representing 600 facilities, is divided into two phases. The first, beginning in 2013, will include all major industrial sources along with electricity utilities. The second, starting in 2015, brings in distributors of transportation fuels, natural gas and other fuels. 

The companies, which represent about 85 percent of California’s carbon emissions, “are not given a specific limit on their greenhouse gas emissions but must supply a sufficient number of allowances (each the equivalent of one ton of carbon dioxide) to cover their annual emissions,” the ARB said in announcing the new regulation last fall.

The entities produce 25,000 tons or more each a year in carbon emissions, the LAO noted.

Under cap-and-trade, companies’ emissions are limited, or capped, but the allowances can be bought, sold or traded to allow the firms’ operations to continue, at least for a while, as emission limits are imposed. The idea is to engage the market place, with its financial incentives and penalties, to cut climate-changing carbon emissions rather than through top-down orders from regulators.

“As the cap declines each year, the total number of allowances issued in the state drops, requiring companies to find the most cost-effective and efficient approaches to reducing their emissions.  The first compliance year when covered sources will have to turn in allowances is 2013,” the ARB noted. 

It is this financial piece of AB 32 of 2006, California’s anti-greenhouse gas emissions law, that has drawn the most controversy. In part, that’s because the advisory committee that endorsed the idea got its marching orders from former Gov. Arnold Schwarzenegger, who demanded a cap-and-trade system, and in part because the pocketbook impact on industry remains unknown.

The law, authored by then Assemblywoman Fran Pavley, a Santa Monica Democrat, requires the state to reduce its greenhouse gases to 1990 levels by 2020. In 1990, there were about 427 million metric tons of these gases or their equivalent in the aggregate statewide, according to the Air Resources Board. Despite the attention on AB 32, fully two-thirds of the reductions to 1990 levels are contained in other air-quality rules and regulations.

Each year, the emissions cap gets tighter and the number of available allowances declines, presumably pushing up the per-allowance cost as demand increases.

 “As the cap declines each year, the total number of allowances issued in the state drops, requiring companies to find the most cost-effective and efficient approaches to reducing their emissions.  The first compliance year when covered sources will have to turn in allowances is 2013,” the ARB said.

Meanwhile, the state will get the proceeds from the auctions. Much of the money must further the goals of AB 32 – curbing greenhouse gases and encouraging clean energy – and some money will go to electricity customers to defray cost hikes.

But in the end, it will be worth it, supporters say.

“We would have preferred that 100 percent of the allowances be auctioned off instead of given away  so no one gets away with polluting our air for free, but the logic is that more companies are going to need time to adjust to a carbon-free world,” said del Chiaro.

“It’s a ramp-up type of program,” she added.


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