Wednesday, November 14, 2012

California Dreaming - Raising Green

by Joseph Sarkis 

California is auctioning greenhouse gas (GHG) emissions allowances today. The proposal to set up a carbon market evolved from California’s AB 32 Act (Assembly Bill 32: Global Warming Solutions Act). The process will be managed by the California Air Resources Board. The specific portion of the act that stipulates the development of market based mechanisms states:
Adopt a regulation that establishes a system of market-based declining annual aggregate emission limits for sources or categories of sources that emit greenhouse gas emissions, applicable from January 1, 2012, to December 31, 2020 (HSC §38562(c)).  In 2011, the Board adopted the cap-and-trade regulation.  The cap-and-trade program covers major sources of GHG emissions in the State such as refineries, power plants, industrial facilities, and transportation fuels.  The cap-and-trade program includes an enforceable emissions cap that will decline over time.  The State will distribute allowances, which are tradable permits, equal to the emissions allowed under the cap.  Sources under the cap will need to surrender allowances and offsets equal to their emissions at the end of each compliance period.

In the halcyon days of ‘we will do something about climate change’ before the 2008 recession, the U.S. tried to utilize the free market and voluntary systems to do this.  The Chicago Climate Exchange (CCX) was the major clearing house for sales of credits.  The trading on CCX stopped in 2010, almost exactly 2 years ago.  The CCX stopped trading in 2010 because of the shift in the political landscape and the midterm US elections win by more conservative parties in the federal government.
The price of the carbonon the CCX peaked at $7.50 per metric ton of emissions in the middle of 2008, before a precipitous fall, which coincided with increased recessionary forces.
A second cap-and-trade program has been in operation in the Northeast U.S. for a few years.  The Regional Greenhouse GasInitiative (RGGI) was formed in 2008 to help manage statewide GHG emissions.  According to its website:
RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. Together, these states have capped and will reduce CO2 emissions from the power sector 10 percent by 2018.
The clearing price of their GHG emissions credits from its auctions has been just under $2.00 per allowance.  According to the World Resources Institute, two more state regional carbon market efforts are scheduled for 2012.
Back to California.  The updated auction notice stipulates that 23,126,110 GHG allowances will be auctioned in this round for 2013 and another 39,450,000 for 2015 (when broader coverage of industries is to be included).  The minimum price is set at $10 per credit (which is much greater than the previous prices from CCX and RGGI).  The auction process is completed by assigning credits to highest bidders first and moving down the bid prices until all allowances have been allocated.  This document provides examples and details of the bidding process.  The auctioning process is similar to the one used in the CCX and EPA for emissions trading that goes back to sulfur dioxide credits in the acid rain program.  An overview presentation for the public and media is located here.
Assuming that only the minimum (reserve) price of $10 is reached, then the total auction sales will bring in $626 million to the state.
News of last minute attempts to stop future auctions are coming through at this time by industry professional organizations.
The implication from reports is that the proceeds of these sales are expected to be used for GHG emissions reduction efforts in California.  There are a number of questions that subsist in my mind. First, in the short run, will California be able to get its clearing price of $10 per credit? Second, and longer term, are these multiplicity of efforts a successful way for the U.S to manage GHG emissions?  Third, is this the fairest way to help reduce emissions?  Fourth, how will these systems fair as the global GHG reduction efforts evolve? Fifth, from a business perspective, how does all this uncertainty affect business decisions and should businesses be lobbying for one overall, less uncertain market?

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