California holds trial allowance auction in preparation for cap-and-trade implementation

On August 30, 2012 the California Air Resources Board (CARB) conducted a test run of the online allowance auction system for the state’s greenhouse gas emissions trading program. The trial auction, which involved no exchange of money or allowances, was conducted to enable market participants to gain firsthand experience with the auction user interface and to allow CARB to discover and correct problems before the first real auction, scheduled to take place on November 14, 2012. The real event will involve the auctioning of 60 million allowances, each representing the right to emit one metric ton of carbon dioxide equivalent.

Auction participants were able to practice completing the online auction application, opening accounts with the financial services administrator, and having bid guarantees processed in the days before the practice auction was held. CARB further provided online training before the event. On the day of the trial run, participants had a three-hour window to submit bids. More recently, CARB surveyed participants for feedback to improve the system. CARB will not release the auction settlement price or the number of allowances sold to avoid creating improper price signals in the allowance market.

The development of a cap-and-trade system for greenhouse gases was required by the California Global Warming Solutions Act, otherwise known as AB 32, which was signed into law by former Governor Schwarzenegger in 2006. The aim of this legislation is to reduce greenhouse gas emissions in California to 1990 levels by 2020. To that end, the law also requires mandatory GHG emissions reporting, determination of baselines emissions, and establishment of early actions.

Enforcement of the cap-and-trade program begins on January 1, 2013 when electric utilities and large industrial emitters will be covered. The program will expand to include fuel distributors in 2015, eventually covering 85 percent of California’s GHG emissions. The cap is set to decline initially at a rate of two percent annually until 2014 and three percent annually thereafter until 2020. Compliance costs are minimized through trading of allowances and maintaining four percent of allowances in a reserve that will become available if the price exceeds a specified threshold. Allowances may be banked by emitters to be used in the future and compliance periods are three years long to smooth variations in allowance price and product output, respectively. To further increase flexibility, the program allows emitters to purchase a limited number of offset credits, which represent emission-reduction projects taking place outside of the cap-and-trade program. Regulated entities must report emissions annually and face penalties for exceeding allowances or missing compliance deadlines.

In developing and implementing the cap-and-trade system, California has been working closely with the Western Climate Initiative, which is providing administrative and technical support. Such state and regional climate programs capping GHG emissions are important in the absence of national cap-and-trade legislation. 

 

For more information:

C2ES: California Cap-and-Trade Program Summary Table

C2ES: California Global Warming Solutions Act

California Air Resources Board: Cap-and-Trade Program Overview

Paul Hastings, LLP: California Holds Practice Auction for its Cap-And-Trade Program