Bidding in California's Cap and Trade Program Begins Today

More than 300 businesses and 600 facilities are expected today to take part in California's bidding process for credits, as part of the ambitious law AB 32 which set up a cap and trade program designed to reduce the state's greenhouse gas emissions to 1990 levels by 2020. The auction will take place in spite of lawsuit filed yesterday by the California Chamber of Commerce challenging the authority of the auction process as well as raising concerns with the potential costs businesses could incur.

In essence, cap and trade programs establish an overall emissions limit - in the case of greenhouse gas emissions, carbon dioxide - of a particular pollutant that is enforced by a regulator. Over time, the cap on emissions is reduced or made more stringent to meet compliance objectives set up by policymakers or regulators. In order to reduce the economic costs associated with the program, major producers of greenhouse gas emissions like refineries, power plants, and industrial facilities are given allowances, which are tradable permits, equal to the emissions allowed under the cap.  An allowance under a cap and trade system is effectively a permit to emit one ton of carbon dioxide or its equivalent. Regulated entities under the cap are then usually required to surrender allowances and offsets equal to their emissions at the end of each compliance period. The amount of free allowances is reduced over time with the objective of trying to create a market-based system where major emitters and businesses can trade credits that have an economic value in order to reduce compliance costs associated with greenhouse gas regulation as well as provide additional flexibility to meet the cap by providng offsets. As the amount of free allowances are reduced and the stringency of the cap increases, the price of emitting a ton of carbon should go up. Thus, businesses which are effectively under their emission target can then sell their credits to those who exceed their cap or will reduce their emissions profile in order to stay under the cap by investing in cleaner technology, etc. 

AB 32, or the Global Warming Solutions Act, was signed into law by former Governor Arnold Schwarzenegger in 2006. As mentioned above, the legislation established the goal of reducing greenhouse gas emissions statewide to 1990 levels by 2020.The legislation also tasked the California Air Resources Board (ARB) with designing and implementing a cap and trade plan that would ultimately put the state on a path of reducing its greenhouse gas emissions by 80 percent from its 1990 levels by the year 2050. Under the plan, capped entities like refineries and cement plants would be given 90 percent of their allowances for free at the start of the program which could also be banked for future use as well. In addition, an allowance reserve was set up in the event that prices for allowances should spike. Further, a price on emitting carbon dioxide and other greenhouse gases would was set by the ARB through an auction process that will be held four times a year beginning this November running through 2020. Two bills were passed during a special session in September 2012 (AB 1532 and SB 535) which directed the proceeds of the auction process to be used in a state "investment plan" that will fund renewable energy, energy efficiency, and resource conservation efforts as well as setting aside 25 percent of the funds to help disadvantaged communities. The reserve or minimum price set for the auction will be $10/allowance and over 21.8 million credits will be made available, according to a presentation released by the ARB. 

A paper published by Resources for the Future, estimates that the initial auction will raise up to $1.8 billion and the overall value of the allowances in the first year of implementation will range between $2.6 and $7.8 billion when all covered entities are ultimately included. The ARB believes it will generate roughly $1 billion through its auction, but regardless of the correct estimate the large scope of this process has only been tried on similar scale by the European Union through its Emissions Trading Scheme or ETS. Many business groups are concerned that the revenue generated are essentially just higher fees or taxes that will be borne by industry and consumers through higher energy costs. The California Chamber of Commerce also filed litigation challenging the authority of the ARB to impose an auction process and has argued that AB 32 only granted the agency the ability to charge administrative fees with setting up the program, not a full-scale auction. According to the complaint, "“What was not authorized by AB 32 is the Board’s decision to withhold for itself a percentage of the annual statewide greenhouse gas (GHG) emissions allowances and to auction them off to the highest bidders, thus raising from taxpayers up to $70 billion or more of revenue for the state to use." The suit also challenges the sale of allowances as an illegal tax, arguing that taxes need a two-thirds vote by the legislature according to the state's constitution. Environmental groups have pushed back on negative assertions raised by business groups, and a spokesman with the Natural Resources Defense Council was quoted in the San Francisco Chronicle, "The same apocalyptic claims about cap and trade for carbon dioxide were made about cap and trade for sulfur dioxide back in the 1990s. And pretty much everyone acknowledges now that was a success."