California Carbon Permits Sell at Auction for Less than Expected

Wednesday, 21 Aug 2013 06:19 PM

 

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California's largest greenhouse gas-emitting businesses paid $12.22 per metric tonne (1.1 tons) for the right to release carbon this year, lower than expected and down almost 13 percent from the previous sale in May, the state said on Wednesday.

Oil refineries, utilities and market speculators were among those that purchased all 13.87 million current year permits offered at the state's fourth quarterly auction, according to the program's regulator, the California Air Resources Board.

For the first time, the state also sold all future-year permits it put up for sale. All 9.56 million allowances it offered to cover emissions in 2016 sold for $11.10 each at the auction, which was held on Aug. 16.

At each auction, the state offers current year allowances as well as permits that cover emissions in future years, so facilities can bank for future needs and plan ahead.

The weak clearing price for current year permits sent the price of California carbon allowance (CCA) futures for December 2013 delivery down 7 percent on the contract's primary exchange.

"The result of $12.22 was lower than we expected," one trader said. "The market is trading $12.50 on the screen right now," he said.

The clearing price may have been softer due to news that the state was planning to give manufacturers and natural gas suppliers more free allowances to ease the burden of complying with the program, the trader said.

The price of CCAs covering 2016 emissions were trading in near parity with current year allowances after several trades were seen for $12.50 each.

 

Emily Reyna of the Environmental Defense Fund (EDF) said the results were a "decisively positive" sign for the nascent market.

"With complete sale of current allowances, diverse bidder participation and stable clearing price, the health and staying power of the carbon market is clear," she said in a blog post.

She said the lower price for current year allowances suggests that companies believe they will have lower than expected costs in complying with the program.

EDF's Tim O'Connor said the fact that the state sold all of the 2016 allowances it offered was a vote of confidence in the long-term prospects of the program.

He said most of the 2016 allowances were purchased by regulated businesses, not speculators.

California's cap-and-trade program is a part of its broader effort to roll its output of heat-trapping greenhouse gases back to 1990 levels by 2020. The state is currently deciding whether to extend the program beyond 2020.

 

The four auctions have raised nearly $396 million for the state so far, money Governor Jerry Brown has said will be loaned to the California legislature to plug gaps in the state budget.

The money is supposed to be repaid in the future into a state-run account to further reduce greenhouse-gas emissions.

The state's three largest utility companies, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, have so far raised more than $626 million from sale of allowances consigned to them by the state.

They are required to use the revenue to protect ratepayers from higher energy bills.

 

Wednesday's results pushed the value of the market past $1 billion, said Ashley Lawson, a senior analyst with Thomson Reuters Point Carbon.

The calculation was made by adding up the total amount of money spent on allowances up to this point, she said.

"It's like getting your driver's license: it's a major milestone, but there could still be bumpy roads ahead," she said.

Businesses have sued over the auctions, saying the state does not have the legal authority to sell permits or collect revenue from the program. The plaintiffs include the California Chamber of Commerce, the state's largest business group. They want the state to give the permits freely to companies covered.

A court hearing on the lawsuits is scheduled to take place in Sacramento next week.

© 2014 Thomson/Reuters. All rights reserved.

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