California’s Carbon Trading System Is Going So Well They Sold Out Of Permits

CREDIT: Rich Pedroncelli / AP Images


CREDIT: Rich Pedroncelli / AP Images

If sales from the latest auction of carbon permits under California’s new cap and trade system are any indication, industry is taking seriously the state’s determination to cut its emissions.

Friday’s auction was the fourth since the program’s debut last November, and it marked the first time demand for permits for the years beyond 2013 actually overwhelmed supply. The sellout “really shows that these companies, probably the big oil companies, are preparing for the longevity of this market,” Emily Reyna, senior manager of partnerships and alliances for the Environmental Defense Fund, told Bloomberg Businessweek.

To explain: California’s cap and trade system was set up by the passage of the Global Warming Solutions Act of 2006 (AB 32). Under the program, auctions of the permits occur once every quarter — so four times a year — through 2020. Each permit allows for the emission of one metric ton of carbon in a designated year, and the auctions so far have included permits for 2015 and 2016 as well as 2013. Participants in the program include utilities, oil refineries, oil producers, and large manufacturers, and AB 32 expands its reach to even more sectors of the state economy in later years. Those permits can then be bought and sold amongst program participants according to whoever feels they’ll need to emit more carbon or who thinks it will profit them more to sell the permits and emit less. The idea is that, when all is said and done, the total amount of permits sold for a given year will decrease from 2015 on — effectively tightening the screws on carbon emitters until greenhouse gases have been cut 15 percent in 2020.

According to Bloomberg Businessweek, at this latest auction there were more bids for the 2016 permits than were made available, the first time that’s occurred for years other than 2013:

California’s Air Resources Board sold all 9.56 million permits for 2016 at $11.10 each during an Aug. 16 auction, 39 cents above the clearing price of all previous sales, the agency said in a report on its website today… The board received 1.69 bids for every allowance offered, marking the first time that demand for advance permits exceeded supply since the state began capping emissions last year, creating the world’s second-largest carbon market.

Futures contracts for the 2016 permits also hit a record 1.83 million on the IntercontinentalExchange. Analysts took the auction results and the futures trading as a sign of AB 32’s strength: “There is now conviction that this program will be here for a while,” Lenny Hochschild, managing director at the White Plains, New York-based environmental broker Evolution Markets, said.

As for the 2013 permits, their selling price dropped somewhat from May, and there were only 1.62 bids for every permit available — the lowest ratio of bids for the 2013 permits since the auctions started. Along with being auctioned off, the law also allows for some the permits to be given away at no cost, and that drop was probably due to intimations that California’s Air Resources Board will be providing more of the 2013 permits for free. That decision by the board might reduce revenue for the state, but it should be remembered that whether a permit is bought or given away freely has no effect on carbon reductions. All that matters is the total amount of permits made available for a given year.