State's 1st carbon auction goes smoothly CAP AND TRADE

FILE - In this Dec. 16, 2010 file photo California Air Resources Board chairwoman Mary Nichols is seen during a CRB hearing in Sacramento, Calif. Nichols was reappointed chair of the CRB by Gov. Jerry Brown, Wednesday, Jan. 4, 2011. less FILE - In this Dec. 16, 2010 file photo California Air Resources Board chairwoman Mary Nichols is seen during a CRB hearing in Sacramento, Calif. Nichols was reappointed chair of the CRB by Gov. Jerry Brown, ... more Photo: Steve Yeater, AP Photo: Steve Yeater, AP Image 1 of / 1 Caption Close State's 1st carbon auction goes smoothly 1 / 1 Back to Gallery

For the first time, spewing a ton of greenhouse gases in California carries a price. And it's $10.09 - less than many analysts expected.

Last week's inaugural sale of greenhouse gas permits under California's new cap-and-trade system brought heavy bidding but a low final price, state officials reported Monday.

Indeed, the price was just 9 cents above the minimum bid set by the state in the auction, held on Nov. 14. Many analysts had predicted that each permit, which allows the holder to release one ton of carbon dioxide and other heat-trapping gases into the atmosphere, would sell for $12 or more.

They saw in the low price a sign that companies participating in California's fledgling carbon market - the largest outside Europe - were unsure about the market's future rules. Two lawsuits have been filed to change the way the cap-and-trade system works.

At the same time, all 23.1 million of the permits for use in the coming year sold out, with the state receiving three bids for every available permit. The high volume suggested to observers that companies covered by cap and trade - owners of power plants, oil refineries and other industrial facilities - were taking seriously their need to comply with the system, snapping up as many allowances as they could early on.

Officials declare success

No problems arose with the electronic trading system created for the cap-and-trade auctions, which will be held four times each year. And consultants monitoring the trading found no signs of market manipulation, leading California officials to declare the auction a success.

"Our goal here is to reduce carbon at a good price for the companies covered," said Mary Nichols, chairwoman of the California Air Resources Board, the regulatory agency that created the state system. "Everybody here is just delighted that it went off just as we intended."

In part, the low price was the result of the auction's unusual rules, which were designed to prevent carbon costs from rising quickly.

Companies participating in California's carbon auction submit sealed bids to the state in advance, stating how many allowances they want to buy and how much they're willing to pay. The auction's managers take those bids and rank them in order of price, from highest to lowest. Then the managers start allocating allowances from the top down until all of them have been handed out. The price at which the last allowance is sold becomes the price that all the auction participants pay, regardless of their original bids.

Last week's auction saw bids as high as $91.13, according to the Air Resources Board. The median bid, however, was $12.96, while the lowest was $10.

"The goal of this auction is not to raise money," Nichols said. "The goal is to achieve the cap at the lowest possible cost to participants. It's a different kind of auction."

In addition, uncertainty arising from the lawsuits may have kept bids low. In the latest suit, filed one day before the auction, the California Chamber of Commerce challenged the Air Resources Board's legal authority to sell allowances, arguing that they should all be given out free to the companies covered by the cap-and-trade system.

A weight on prices

"That's obviously weighing down on the prices right now," said Ashley Lawson, a senior analyst with Thomson Reuters Point Carbon, an information service tracking carbon markets worldwide. "When it came time to put their money where their mouth was, compliance entities didn't want to bid very high."

That uncertainty extended to allowances intended to be used several years in the future. Last week's auction included 39.5 million allowances that can't be used until 2015. Only 5.6 million of them sold, with a closing price of $10 - the minimum allowed.

"Since we're at the start of the market, people are naturally going to be cautious about staking out a position that far in advance," said Fabio Nehme with EDF Trading, a French company active in Europe's carbon market.

Cap and trade sets a declining limit - or cap - on the amount of greenhouse gases that California's economy can emit each year. Companies that produce large amounts of carbon dioxide buy and sell allowances to be able to produce those gases.

As the cap drops year by year, so does the number of allowances available. That pushes up the allowance price, making carbon pollution increasingly expensive. Companies that are able to slash their greenhouse gas emissions quickly can sell their spare allowances to businesses that are having a harder time making the cuts.

Although higher carbon prices will give companies a powerful incentive to rein in their emissions, state officials don't want prices to spike too high, too fast. The auction mechanism they devised reflects that wish. In some ways, it's the exact opposite of a traditional auction, in which bidders try to top each other's price.

Almost all of the allowances - 97 percent - were sold to companies that have to participate in the cap-and-trade system, including such large emitters of greenhouse gases as oil giant Chevron and power plant operator Calpine.

But some of the allowances went to traders with financial outfits such as EDF Trading and Morgan Stanley Capital Group. They are expected to be active participants in the "secondary market" for allowances, buying and selling with other traders as well as with companies covered by California's emissions cap. Futures contracts based on California carbon allowances have been traded for more than a year, with prices ranging from $12 to $22, according to Thomson Reuters Point Carbon. Last week, those futures traded between $12 and $12.30.

'Important first step'

For many environmentalists, the auction marked a historic moment.

Two years ago Congress rejected Democratic efforts to create a national cap-and-trade system. And other attempts to set a nationwide price on greenhouse gases, such as slapping a tax on carbon dioxide emissions, have gone nowhere. Many economists consider putting a price on carbon to be a necessary step toward reducing emissions and shifting to cleaner sources of energy.

"We've got a price, it's not hypothetical anymore, and it's an important first step toward meeting our goals," said Nathaniel Keohane, vice president of the Environmental Defense Fund. "This is a program that's in place for the long term."