California's first carbon market takes flight

The California Air Resources Board announced yesterday the results of the first cap-and-trade auction, held last Wednesday, to limit carbon pollution from large emitters under California’s clean air law, AB 32.

Two items were for up for sale: carbon pollution permits (known as allowances) for use starting in 2013, and allowances for use starting in 2015. Yesterday's results revealed that auction participants, including the state’s petroleum companies and other large industrial emitters, snapped up all of the 2013 allowances, at a clearing price of $10.09, and 5.5 million of the 2015 allowances, at the auction floor price of $10. The 2015 allowances that did not sell will be held back from the market until 2015.

As expected, some participants opted for a wait-and-see approach, bidding at or near the floor price. That’s not surprising, considering that last week’s auction was only the first of five scheduled over the course of 2012-2013. As the market takes shape, participants will glean a better understanding of the true market price of reducing a ton of carbon pollution, which will inform future bidding strategies. The program’s first "due date" is not until Nov. 2014, when covered facilities will need to turn in allowances and offsets equal to 30 percent of their 2013 verified emissions.

The advantage of a single statewide cap on pollution is that when and how facilities choose to acquire allowances does not impact the pace of emission reductions: As long as they all come due in full and on time, emissions will have been reduced. Yesterday’s results were important in showing the auction went off without incident; expect future auctions to be more indicative of the price of carbon in the market after trading picks up.

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Next page: Auction proceeds to benefit consumers