Southern California environment news and trends

California's carbon market opens; Air Resources Board reports that auction sets allowance prices at $10.09 a ton

The results of California’s first-ever auction for greenhouse gas permits are in. The state regulators overseeing a new "cap and trade" market for greenhouse gas report that the price for carbon, was just over $10 a ton. That's lower than some analysts had guessed, but California Air Resources Board chair Mary Nichols still liked what she saw: 

The auction was a success and an important milestone for California as a leader in the global clean tech market. By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future.  That means new jobs, cleaner water and air -- and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient.

Under a new system, the California Air Resources Board sold more than 23 million allowances in this first auction that happened over three hours last week. Today the ARB is reporting allowance sales will generate nearly$300 million  for the state's coffers (including future allowances sold - they're not useful till 2015).

Remember, this auction happened because large California companies that spew greenhouse gas pollution into the atmosphere will soon need permits to keep operating. Those allowances, each representing 1 ton of pollution, are a commodity, and the state created a market for them.

California’s “cap” for greenhouse gas pollution takes effect in January. Businesses and bankers will now trade these allowances, which are expected to grow in value as they grow more scarce. (Listen to Matt DeBord and me on Take Two from last week, in a segment produced by Sanden Totten.)

The allowance price set at last week's auction, $10.09 per ton, is just 9 cents over the state's minimum. On the plus side, the DeBord Report told me earlier Monday, that suggests the state set that floor correctly. 

And several observers with whom I spoke said the important thing simply is that the auction functioned without any observable collusion, fraud, glitches, or errors. 

"One of the nice things about this is, there weren’t any surprises," said Nat Keohane, an economist with the Environmental Defense Fund. He says companies that need the permits got heavily involved in the auction; that suggests the state’s system is well designed, he argues.

"Lots of businesses wanted to participate. Looks like lots of businesses got the allowances. They went to folks who need them, you know, and most importantly, that gives the signal that investors need, that businesses need, to make plans," he says. At a minimum, this first auction helps market participants figure out "what the opportunities are to make profit and to cut carbon pollution in the most effective way possible."

But is it bad if the allowance price is lower than expected? The Climate Action Reserve's Gary Gero says no: 

I’m not worried about allowance pricing here at the outset since what really matters is that we have a market that serves our goal of reducing greenhouse gas emissions. Over the long term, the market will find the most cost effective opportunities to do just that, regardless of what happened in this very first auction.  Everyone who’s been supporting what AB32 stands for is celebrating the fact that we are on track with policies and programs to transition to a cleaner, more efficient 21st century economy.

Alex Jackson is legal analyst for California’s climate policies at the Natural Resources Defense Council. He says it’s too early to draw conclusions about how well the market will work to combat global warming.

"Keep in mind there are 7 more auctions over the next 2 years before allowances are due to the state," Jackson says. (The state's planning an auction a quarter.) He predicts that the trading market has plenty of growing to do over these next couple of years. "A few months down the line will be a more accurate time to assess what the price of allowances really is in the market," he says. 

Something to keep in mind in these early stages is that the analysts who tend to comment on the prospects for a carbon market also tend to be bullish on its prospects, who see California's investment in clean energy and technology as an advantage. Samantha Unger Katz is a managing director for BGC environmental brokerage services: 

The California Air Resources Board’s decision to certify the auction results today is another signal to the market that we are inching towards the start of the compliance obligations under the cap and trade program. The auction clearing price below the current December 13 Vintage 13s futures contract pricing echoes the sentiments expressed by some market participants regarding the uncertainties and the sheer volume of allowances being auctioned in this round. We do anticipate continued new market entry, trading and price volatility over the next few months. It will be interesting to see what happens between now and February, when the second auction is scheduled to take place.

If you're wondering what the state's going to do with the money generated in this first auction, it’s headed for investor-owned utility companies. Regulators are supposed to use it to protect consumers from higher electric bills that could result from cleaner energy choices.

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