Final Test Before California’s Cap-and-Trade Program Kicks Off

Kristin Eberhard’s Blog

Final Test Before California’s Cap-and-Trade Program Kicks Off

Posted August 23, 2012

Next week’s scheduled practice auction of greenhouse gas allowances for California’s largest polluters will provide an important first look into how the state’s cap-and-trade program, a key element of the Global Warming Solutions Act (AB 32), will work going forward.

With millions of dollars worth of allowances planned to be auctioned in the coming year, and everyone watching to see whether California can successfully implement the nation’s first economy-wide cap-and-trade program, it’s important to get this right. These allowance auctions are an important part of the plan to reduce carbon pollution to 1990 levels by the year 2020.

Although the California Air Resources Board announced in March it would delay the first auction of carbon permits from August until Nov. 14, and instead hold a trial run this month, it is prudent to try the system now and give participants an opportunity to test out and understand the process. As Board Chair Mary Nichols told Bloomberg News last week, “We’re in the process of cleaning up every loose end or issue that hasn’t yet been definitively addressed.”The goal is to make sure the quarterly auctions that follow go smoothly.

All facilities regulated by California’s cap-and-trade program are eligible to participate in next week’s simulation in preparation for the first real auction in November, which precedes the official 2013 start of the program. Power plants and large industrial facilities emitting more than 25,000 tonnes of GHG pollution annually, such as oil refineries and cement manufacturers, will be covered first. Transportation fuel and natural gas distributors will join them beginning in 2015. However, that doesn’t exclude non-regulated entities such as NGOs or financial institutions from being eligible to participate too.

The program sets a “cap” on their carbon dioxide pollution, but allows the buying and selling (“trade”) of pollution credits, known as “allowances,” at the auctions in order to comply. Each year the cap declines, meaning there are fewer allowance available, and industry must reduce emissions or pay increasingly higher prices for allowances to account for their carbon pollution.

California’s program already has earned praise from a leading climate economist as the best designed cap-and-trade program anywhere in the world. In April, Dallas Burtraw, one of the nation’s foremost experts on environmental regulation in the electricity sector, told the California Senate’s Select Committee on the Environment, the Economy and Climate Change that “the cap-and-trade approach is more than theory,” and that “it has been put into practice many times, especially in the regulation of air pollution, and can be attributed with cost savings of billions of dollars compared to traditional regulatory approaches.”

“Such cost savings are good for business and consumers; and costs savings are good for the environment because it means society can afford greater emissions reductions,” Burtraw added in his testimony.

The auctions are expected to generate millions of dollars in revenue that must be used to meet the goals of AB 32, prompting extensive discussion of how exactly to spend them. A macro-analysis by Next 10 released earlier this year said if done right, the revenue can save money and increase employment; channeling it toward household energy efficiency and renewables will provide the most bang for the buck.

ARB (and NRDC) is confident that next week’s practice auction is critical to ensuring the cap-and-trade program runs smoothly starting in November, and any problems that are revealed during this test will be addressed early enough to ensure the system and process is free of any roadblocks come November.

We’re hopeful that the upcoming trial auction will put California one step closer to reaching its clean energy goals.

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