State’s first cap-and-trade auction in the history books

It was kind of like eBay.

For three hours on Wednesday, millions of dollars worth of pollution credits were expected to be sold to scores of companies at California’s first auction under the state’s 2006 law to curb greenhouse gas emissions.

The auction, which went forward despite legal challenges, is unique among the states, although a regional system for electricity only exists in the northeast and a similar setup is in effect in Europe.

Who bought what won’t be known until Monday, but on the block were 21.3 million current credits available in 1,000-unit lots with a minimum bid of $10 per credit, which companies can begin using quickly, plus nearly 40 million credits available for use in 2015. Each credit is worth a metric ton of carbon emissions. As the auction got under way, credits were believed to be worth about $12 each, slightly above the floor, according to one market expert. That estimate is in line with earlier state projections, which placed the per-credit value at $10-to-$13.

The complex auction, conducted entirely via computer hookups with industrial bidders under high security, is at the heart of the state’s attempt to cut climate-changing greenhouse gases to 1990 levels within the next eight years.  Some 360 companies, including power companies and cement plants, that run about 600 industrial sites across the state were targeted for the initial auction, according to the Air Resources Board. The companies’ formal intent to bid had been submitted by the Nov. 7 deadline.

The companies already have free credits covering 90 percent of their current emissions. What they are bidding on now are the credits to cover the remaining 10 percent, thus allowing them to continue operating while they gradually ratchet down on emissions to comply with the 2006 law. The carrot-and-stick approach of the law, AB 32, is to allow companies to cut their carbon emissions over time as they improve the carbon efficiency of their operations and cut pollution.

But the actual number and mix of auction participants won’t be known until Monday, although there were indications beforehand of who planned to bid.

“The really big players may not be in this early round,” said Jasmin Ansar, a climate change economist with the Union of Concerned Scientists. “But this is the first of many auctions, and they will have many opportunities. You’re likely to see a big flurry of activity as the compliance deadline nears at the end of 2014.”

Bernadette del Chiaro, an energy and global warming specialist with Environment California, agreed.

“The  90 percent giveaway of allowances is going to make this initial auction a little bit smaller, but that was intentional,” she noted.

In the initial auction, the key participants were expected to be power generators, those who provide electricity through fossil fuels. Other industries include steel and cement manufacturers. The 2015 credits target power distributors, which include the state’s major utilities. Through 2012, 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. First-year auction proceeds were estimated at $550 million to $900 million.

The precise benefits to the state of the auction are uncertain, although the proceeds are supposed to further the goals of AB 32, signed into law by former Gov. Arnold Schwarzenegger.

But even before the auction began, state chamber of commerce went to court to try and stop it. The ground rules for the auction have been in effect since 2011, but the lawsuit was filed the day before the auction got under way – an 11^th hour move that surprised observers.

“We don’t challenge the authority of AB 32 or CARB’s authority to implement a cap and trade program. We have always worked with CARB toward effective implementation, but they have clearly decided to turn the auction into a money raiser. We support any legal action to ensure that California gets what it was promised — a cost effective, technologically feasible, and legal regulatory plan to reach our emission goals,” Jack Stewart, head of the California Technology and Manufacturing Association, said Tuesday in a written statement.

In February, the Legislature’s nonpartisan fiscal adviser estimated 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.

Whatever the participation in the auctions, there will be plenty to bid for: Between now and 2020, the regulator will make available up to 2.5 billion allowances, in a mix of free and paid credits.

The phase-in of the carbon emission controls 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.

Together, the companies, which represent about 85 percent of California’s carbon emissions, produce some 25,000 tons or more annually in carbon emissions.

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.

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.