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Auction to kick-start California carbon market

Date: 09-Nov-12
Country: USA
Author: Rory Carroll

California will next week sell more than 60 million CO2 emission permits in a move that will get the world's second biggest carbon market off the ground.

More than 350 of the state's biggest emitters, including utilities Pacific Gas & Electric and Southern California Edison, will be bound by the scheme, which aims to help California bring greenhouse gas emissions back down to 1990 levels by 2020.

"We're ready to go, we're ready to launch," Mary Nichols, the chair of California Air Resources Board (ARB), the agency that administers the program, said at Stanford University this week.

Businesses have sporadically traded allowances on a forward basis for more than a year, but the November 14 auction will mark the first big injection of liquidity into the market.

ARB will sell 21.8 million allowances that can be used to cover 2013 emissions and 39.5 million allowances that cover 2015 emissions in an auction that could raise over $600 million in cash.

Analysts say they expect all the 2013 permits to be sold at prices between S11 and $12 per unit, which would be about a dollar below recent market prices, but above the scheme's $10 floor price.

However, concerns about potential lawsuits and other challenges that might derail the scheme have caused observers to predict that the auction for 2015 permits might be undersubscribed, and that allowances are likely to be sold at the $10 floor.

The Californian emissions market will be the world's second biggest after a 30-nation European market.

Nine northeastern U.S. states are already using a market mechanism to cut carbon emissions, and markets are operating or underway in Australia, China, Japan, Kazakhstan, New Zealand, Quebec and South Korea.

But critics, including trade groups representing manufacturers and oil refiners, continue an 11th-hour push to stop the auction, claiming it is a unnecessary and will raise energy prices.

Lawsuits are expected from other groups soon after the auction, when companies can claim they've been damaged by the program.

Out-of-state power producers with coal interests who sell electricity to California are among the most likely plaintiffs, legal experts say.

They will likely argue that the cap-and-trade program disadvantages their electricity in favor of California sources in violation of a U.S. Constitution dormant commerce clause, and will ask a federal court to put the brakes on the program.

The ARB is already fighting a legal challenge brought by some employees of the Environmental Protection Agency (EPA) who think offset credits should be banned from the program.

On top of legal opposition, some powerful voices in California have recently expressed their concern about the program.

Mike Wirth, executive vice president for downstream and chemicals for California-based oil company Chevron, said earlier this month the cap-and-trade program will cost jobs and drive up the cost of gasoline while doing nothing to combat climate change.

"California has a go-it-alone plan on greenhouse gas emissions and it will further deteriorate what is already a weak economy and it will make no meaningful impact on global greenhouse gas emissions," he said.

The ARB will announce the results of the auction on November 19.

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