California's cap-and-trade auction starts Wednesday

The Sacramento BeeNovember 13, 2012 

— Despite fierce opposition from much of the business community, California's grand experiment in taming global warming begins in earnest Wednesday.

State officials are set to auction tens of millions of dollars' worth of carbon-emission allowances to scores of oil refiners, cement manufacturers and other large industrial polluters.

The computerized auction marks the beginning of California's "cap-and-trade" market. The market is the centerpiece of Assembly Bill 32, the state's 2006 law aimed at reducing greenhouse gases, and Wednesday's kickoff is being closely watched.

"A lot of eyes are on us," said Harold Pestana, a senior manager at Pacific Gas and Electric Co., one of the companies affected by the state law.

Cap and trade will force affected companies to scale back their carbon pollution – or purchase allowances to get into compliance.

State officials and environmentalists say the market-based approach gives companies flexibility in how they reduce emissions.

Many affected businesses call it a cleverly disguised tax that will cost them upwards of $1 billion in the first year. The expense will balloon in 2015, when refineries will have to buy more credits to cover greenhouse gases spewed by cars and trucks.

"It's going to be a huge burden," said Shelly Sullivan of the AB 32 Implementation Group, a business coalition. "That turns into a multibillion-dollar energy tax on the state's economy."

Her group, which includes the California Chamber of Commerce and the California Manufacturers & Technology Association, has petitioned Gov. Jerry Brown to abort the auction.

But the auction is expected to proceed.

"Everything is still on schedule; we're moving forward," said spokesman Stanley Young of the California Air Resources Board, the agency running the auction.

Carbon trading isn't new. Polluters in the European Union have been subject to a greenhouse gas market since 2005, and a similar program covers power plants in the northeastern United States and eastern Canada.

But until Wednesday, when carbon trading comes to California, it's never been tried on a large scale in America.

More than 62 million allowances – each representing the right to emit a ton of carbon – will be offered for sale in a three-hour window starting at 10 a.m. The minimum bid price is $10 a ton.

The auction will be a low-key affair. It will be run electronically, with a half-dozen staffers monitoring the bidding behind closed doors at agency headquarters in Sacramento.

"This happens in a sealed room with no windows," said David Clegern, another agency spokesman.

The agency says potential buyers aren't allowed to publicly discuss their purchasing plans, out of fear that disclosure could skew the market. Results of the auction, including pricing and volume, won't be revealed until Monday.

Some analysts believe many potential bidders will sit out Wednesday's auction. Another auction is set for February, and there will be regular auctions each year. Besides, companies needing carbon credits will be able to buy them on the open market and don't have to go through the state.

Uncertainty could dampen bidding in the first auction as well. Jon Costantino, head of the Association of Carbon Market Participants, said bidders might be dissuaded by rumors circulating that an industry group could file a last-second lawsuit to block the auction.

Analysts say the uncertainty has caused prices to drop on private futures markets where California carbon credits have been traded for months. The per-ton price, which had been around $20 over the summer, has fallen to around $12, according to Bloomberg business news.

Low prices could undermine the state's goal of curtailing emissions. If carbon is cheap, there's less incentive for industries to reduce their pollution. That's why the Air Resources Board has set a $10 minimum on bidding in the state's auction.

While businesses complain about costs, environmentalists say a strong carbon price will pay dividends for the economy: It will give polluters an incentive to invest in green technologies to clean up their smokestacks.

The market will work like this: California has set an overall ceiling on the amount of carbon that can be emitted. The cap will decline by 2 percent to 3 percent a year. By 2020, emissions are supposed to fall to 1990 levels.

The affected companies include more than 400 of California's industrial heavyweights. They will get 90 percent of their emission allowances free in the first two years, but the percentage of freebies will decline in future years.

Business groups say California could achieve its goals of curtailing carbon without holding an auction. The state, they say, could simply give away all of the emissions allowances for free, and then enforce the cap. As companies move toward compliance, they will buy and sell the allowances among themselves and a price will emerge for carbon.

But state officials reject that argument. The Air Resources Board says an auction is needed to jump-start the market and make sure a competitive price for carbon is established.

California was hoping the market would cover multiple Western states. But only the Canadian province of Quebec is linking its carbon with California's, starting next year.

As a result, businesses in California say this go-it-alone approach leaves them at a cost disadvantage against companies in other states.

"Our California operation is certainly exposed to out-of-state competition that does not have to comply," said Bruce Ray of Johns Manville, which runs a fiberglass insulation plant in Willows.

Bill Klesse, the chief executive of Valero Energy Corp., owner of two California refineries, ripped the upcoming auction during a recent conference call with investors. "They're coming up with regulations that are totally not workable," he said.

The big utilities are being treated differently than most participants. The state has crafted a complicated scheme designed to buffer their customers from major rate shock. How well the buffer works isn't yet known, however.

"We can't really say what the cost impact to our customers is going to be," said Lynsey Paulo, spokeswoman for PG&E, which supports the auction plan. "We know there's going to be one."

Cap and trade should be pain-free for customers of the Sacramento Municipal Utility District. SMUD said it has enough hydroelectricity and renewable energy that it won't need to buy any carbon allowances for at least several years, meaning there will be no cost to customers.

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