California’s First Carbon Auction: Without a Hitch or Full of Glitch?

For those interested in California’s cap-and-trade program, all eyes are on the first-ever auction of greenhouse gas emission credits (or “allowances”) scheduled for Wed., Nov. 14. Although the first wave of regulated entities were allocated free allowances to meet up to 90 percent of their recent emissions, such entities will have to cut their emissions in coming years or buy allowances or offsets to make up for any emissions over and above the allocated allowances.

Although buying and selling of offsets and allowances has been going on for some time via spot and exchange trades, the auction puts a spotlight on the burgeoning market as the program’s Jan. 1 compliance commencement date looms.

More than 23 million allowances for use in 2013 are being auctioned, with an additional nearly 40 million being auctioned for use in 2015. Bids are being sold in multiples of 1,000, and the floor price has been set at $10 per allowance. Both the state and private entities holding allowances will be selling at the auction. It is anticipated that the auction could raise more than $600 million for the state, and that future auctions could raise billions more.

The auction will be conducted electronically. To participate, eligible participants must have already registered and been approved as users in CARB’s market tracking system. Various market players have planned to participate in the auction, including regulated entities and investors.

A test run of the auction took place last month and was reported by CARB and others as a success. Whether next week’s actual auction, if it occurs as scheduled, will be perceived as a success will depend not only on the auction’s mechanics, but also, of course, on the trade price established for the allowances.

There has been some speculation that state officials might yet decide to postpone the auction due to threatened litigation that, if filed, could chill potential buyers’ willingness to bid. However, with the re-election of President Obama, the Democratic dominance in state government and the national discussion regarding a possible link between climate change and Hurricane Sandy, a decision could be made to go forward with the auction despite potential auction participation impacts.