An inside look at California's cap-and-trade program

GB: One of the concerns of this program is that companies might move out of the state to avoid participating in it -- the concept of “leakage” -- what can be done to prevent it?

DC: Well, it is an issue, and what is done to prevent it at this point is that a certain percentage of the free allowances that companies get are based on preventing leakage. If we run into a particular sector or a facility that is in some way unique and has a problem in meeting what we need them to accomplish is that we will work with them.

A good example of that is the cement industry. One of the more common kinds [of cement] is called hydraulic cement, which is the kind of cement that will stay hard underwater. In the process, what’s called clinker [a substance necessary to producing hydraulic cement] is made.

The problem with clinker is that there is no alternate technology for making it. And at this point, there is no way to make hydraulic cement without manufacturing it, but it is extremely greenhouse gas intensive. So we sat down with the cement people and talked that through, and what we arrived at was that, because their process emissions is not something that they can really do anything about except go out of business, we gave them a modification to their allowance budget that will take that into consideration.

GB: What modifications are given to businesses like cement companies that have difficulty lowering their emissions?

We work with individual facilities and entire sectors to make compliance manageable. In some cases, that has involved additional [free] allowances. In others, it has involved allowing them to enter the program later, as is being done with the combined heat and power facilities. 

GB: How can businesses that are not participating in the auction in November buy their allowances?

DC: In 2013, there will be four auctions, and in 2014, there will be four auctions. There’s also whatever’s out on the secondary market, which we really have no involvement with, other than that we track the allowances that are handed off from party to party. There should be adequate allowances around. The primary advantage of getting into it early is that there’s a very good chance that the price will be lower.

GB: Is California’s cap-and-trade program modeled after other cap-and-trade programs in the world?

DC: To some extent California’s program is modeled after the regional greenhouse gas initiative in the Northeast, and the European Union’s emissions trading system. But the Air Resources Board has adapted those plans and made changes to suit the market we’ll be dealing with. 

GB: What are the costs associated with California’s cap-and-trade program?

The projected costs for the various contracts associated with cap-and-trade program are (24-month contract): 

Auction operator -- Markit, North America: $750,000

Financial services administrator for auctions -- Deutsche Bank: $500,000

Market analytics -- Market monitor: $400,000

Market training for state staff -- Cutting Edge Capital: $200,000

Development of tracking system, international linkage administration, contract management and other services -- Western Climate Initiative, Inc.: $3.7M