Pacific Swell

Southern California environment news and trends

California hopes practice makes perfect for cap-and-trade; real carbon auction set for November

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Just months away from the start of California's first effort to cap, trade, and reduce carbon, the stakes are high for state regulators to get it right. Hundreds of companies are involved, not to mention billions of dollars.

Last week the California Air Resources Board ran a practice for November's big day: the auction that will set in motion a market for carbon emissions in California. (I was on vacation, failing to draft a useful wide receiver in the fantasy draft.) For three hours on the last Thursday in August, participants pretended to take part in bidding for "allowances" to emit greenhouse gases in California. I'll let NRDC's Kristin Eberhard continue the explanation: 

The program sets a “cap” on their carbon dioxide pollution, but allows the buying and selling (“trade”) of pollution credits, known as “allowances,” at the auctions in order to comply. Each year the cap declines, meaning there are fewer allowance available, and industry must reduce emissions or pay increasingly higher prices for allowances to account for their carbon pollution.

According to Dana Hull of Silicon Beat, the auction/shakedown cruise went "fairly well." And according to Hull, and the state's website, CARB chairwoman Mary Nichols agrees. "We will be combing the record for every minor glitch we can possibly find to fix," Nichols comments. "[B]ut I am delighted that everything so far shows that the practice auction went well, and that the participants found the auction website easy to use."

Two reporters selected by CARB participated in the auction, and filed pool reports. (Another mark of how seriously the state takes this exercise is that the term "pool report" appears; I've only seen it previously applied to Presidents of the United States and governors of California.) 

One pool reporter was Carolyn Whetzel, of Bloomberg BNA's Daily Environment Report. She said the practice was actually two separate auctions: one for 20 million vintage 2013 allowances, and another for 40 million future 2015 allowances, all valued at a minimum of $10/allowance.  

About 150 entities and people signed up for the practice session, mostly the kind of businesses that will need allowances -- a few "financial types" (as CARB spokesman David Clegern called them on August 29).

Nobody got to see how anybody else bid, though the reporters wrote about their own bids. First Whetzel: 

$14 per allowance for 20,000 (20 lots) vintage 2013 allowances; $15/allowance for 15,000 (15 lots) vintage 2013; $19/allowance for 50,000 (50 lots) vintage 2013; $18/allowance for 10,000 (10 lots) vintage 2015; $20/allowance for 18,000 (18 lots) vintage 2015; and $25/allowance for 22,000 (22 lots) vintage 2015.

The other pool reporter, the Sacramento Bee's Dale Kasler, also got in on the bidding: 

After logging into the WCI auction website, I clicked on the Auction tab, and then "Add Bid." I hemmed and hawed for a couple minutes as to what kind of bid to place, but even with fake money I decided to go conservative. I placed a bid at $18 apiece for ten lots (10,000 tons of 2013 carbon emissions). I hit the "confirm" button and my bid showed up on the screen. I put in a second bid at $19, for 15 lots (15,000 tons), repeated the process and I was done.

A little while later, I decided to test the system a little. I went back into the auction. This time I ignored the $10 reserve minimum and placed a bid for five lots at $9 apiece. I expected the system to reject the bid, but it didn't. Turns out that process occurs once the bidding window has closed and the auction is over.

Opponents to AB32, skeptics of climate change, and chambers of commerce pushed until the final hour last week to stop the practice auction. A lot of those groups, and for that matter polluters, would love it if California gave away allowances. (European authorities have caught hell over the years for giving away allowances at the start of the electricity market.)

But a group of economists, including friend of this blog Matt Kahn of UCLA, and Pitzer College's Maya Federman, sent a letter to the state urging it to continue on the path it's chosen. They wrote, "Auctioning allowances generates proceeds for government to redistribute to households, reduce other taxes, or achieve further environmental and equity goals that otherwise may not be achieved if allowances are given for free."

By now, participants have gotten an email about "sample results." By today, the state plans to complete a survey of people who participated. November 14th is the real auction date. 

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