Sunday, December 30, 2012

California Air Resources Board Quarterly Auction 1

The California Air Resources Board (ARB) held its first auction of greenhouse gas allowances (GHG) on November 14, 2012. The auction included a Current Auction of 2013 vintage allowances and an Advance Auction of 2015 vintage allowances. Below are key data and information on the results of the auction.
All 23.1 million allowances sold in California's first cap and trade auction.
California Air Resources Board Chairman Mary D. Nichols stated "The auction was a success and an important milestone for California as a leader in the global clean tech market. By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future.  That means new jobs, cleaner water and air -- and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient.”
On November 20, 2012 in the Silicon Valley Mercury News at Dana Hull notes:
There were three times as many bidders than buyers, a sign that the business community is taking the new carbon market seriously. A ton of carbon sold for $10.09 at the auction, just slightly above the $10 floor price established by regulators... More important, all of the 23.1 million permits offered at the auction to cover 2013 emissions were purchased, raising $233 million and calming fears that the market would be under-subscribed.  The money will be funneled to residential customers of the state's utilities to offset higher electricity rates that are expected to result from the shift to clean energy.
Under a proposal released Friday, California residents would twice a year get a "climate dividend" worth about $30.  While some speculated that the nation's biggest banks would jump into the new carbon market and buy up allowances, 97 percent of the allowances were purchased by "compliance entities," or companies that must reduce their greenhouse gas emissions....California's cap-and-trade program is the cornerstone of the state's landmark global warming law, known as AB 32, that was signed by Gov. Arnold Schwarzenegger in 2006. AB 32 includes a suite of regulations meant to dramatically reduce emissions of heat-trapping gases, including requiring utilities to obtain 33 percent of their electricity from renewable sources by 2020.  Under the program, the state sets an overall emissions "cap" for individual California companies that emit more than 25,000 metric tons of carbon dioxide or other greenhouse gases. Those that reduce emissions below their cap can sell or trade their unused allowances to companies that exceed their limits. If the system works as designed, the most efficient companies will be financially rewarded, polluters will pay and greenhouse gases will be dramatically reduced.  An independent market monitor verified the results of last week's auction and found no evidence of collusion or manipulation in the bidding process, according to Nichols.  The Air Resources Board did not release a list of which companies participated in the auction and which stayed on the sidelines. But several of the state's largest entities, including Chevron, ConAgra, the Regents of the University of California and Valero were among the list of "qualified bidders."...The state also auctioned 39.5 million permits that cover 2015 emissions; of those only 5.6 million allowances were sold, all at $10 a ton....
Petroleum refiners, manufacturing companies and other industries have been outspoken opponents of the program, calling it an illegal tax that will hurt California's economic recovery. Last week, the California Chamber of Commerce filed a lawsuit seeking to invalidate the cap-and-trade auction, arguing that the Air Resources Board exceeded the authority granted under AB 32.  But cleantech venture capitalists cheered the outcome.
California carbon futures fell to a new low ... as investors waited for the state to disclose on Nov. 19 how many permits were sold and the price paid. The program covers 85 percent of emissions in an economy valued at $1.74 trillion last year. California is giving away about 90 percent of allowances in the first phase and auctioning the rest in what will be the second-biggest carbon market, after the European Union program....  Futures contracts based on carbon permits for 2013, the first year of compliance under the program, fell 25 cents to $12.15 a metric ton yesterday, according to data compiled by CME Group Inc. (CME)’s Green Exchange in New York. Permits are down 40 percent from this year’s high of $20.25 on July 24.  Permits for the first compliance period were expected to clear between $12 and $15 a ton in yesterday’s auction, according to Bloomberg New Energy Finance.... 

California plans to cap carbon emissions beginning next year from power generators, oil refineries and other industrial plants. The limit will decline each year to achieve a 15 percent reduction in emissions by 2020. Companies must surrender carbon permits to cover their emissions over three phases of the program. Those that discharge less than their cap can sell their spare allowances.... The Chamber of Commerce argued in its lawsuit that the air board lacks authority to sell carbon allowances, saying it’s paramount to an invalid tax costing taxpayers $70 billion.... Market liquidity has already been “crippled by buyer and seller hesitation to sign forward contracts,” Thomas Marcello, a Bloomberg New Energy Finance analyst in New York, said in a research note Nov. 8....The EU will auction most of its emission permits starting next year after giving away the majority of each year’s allocation since 2005. Australia plans its first carbon auction in 2014.
On November 20, 2012 in "California’s CO2 Now Has a Price, but a Low One" Felicity Barringer of the New York Times pointed out:
The results of the first auction, announced on Monday, came as both a relief and a bit of a disappointment, although state officials put the best face of it. Among traders and regulators, there was relief that all of the 23.1 million allowances covering 2013 emissions that were up for auction were sold. ... Polluters do not have to submit the allowances to cover their emissions until November 2014.  “Given the lack of short-term requirements to purchase anything, I would say market participants that we spoke to were surprised that the full volume cleared and that it was three times oversubscribed,” said Lenny Hochschild, the managing director of global carbon markets for the advisory and brokerage firm Evolution Markets.  And Thad Huetteman, the president of Power and Energy Analytic Resources, said: “It closed close to the minimum, but clearly there was demand for the allowances. Since we defeated that expectation — that the market would be undersubscribed — that caused a sigh of relief.”  But some analysts had expected a higher final price — at least between $11 and $12, not a bare nine cents above the $10 floor.  Mr. Hochschild suggested that the outstanding legal challenges to the cap and trade program, one of which was filed by the Chamber of Commerce on the eve of the Nov. 14 auction, made investors skittish about the program’s long-term viability and thus depressed the price.  While proponents of the new market feel that it will become more robust once financial firms actively take part, the overwhelming majority — 97 percent — of the allowances sold in California’s first auction went to what the air regulators refer to as “compliance entities” — the companies that must account for their greenhouse gas emissions.  Most of the nearly $300 million in auction proceeds is likely go back to investor-owned utilities in the state like Southern California Edison and Pacific Gas & Electric Company, to be directed back to their customers. On Friday, the California Public Utilities Commission announced a proposed division of these spoils: 85 percent to households, which would receive a “climate dividend” of $30 on their bills twice a year; 10 percent to small businesses; and 5 percent to help industries whose out-of-state competitors do not have to pay for the pollution they generate.

On the other side of the country, the Regional Greenhouse Gas Initiative, a coalition of Northeastern states that has imposed a cap and trade system on the electric utility sector, has so far had 17 auctions of emissions permits. The administrator for that program recently told Point Carbon that the system has lowered electricity bills overall in the Northeast by $1.3 billion since 2009.  In the first eight RGGI (pronounced reggie) auctions, the subscription of current permits sold out. But that has only happened once more in the ensuing nine auctions held since the fall of 2010. The clearing price for an allowance after the most recent auction was $1.93.
On December 24, 2012 in "California Law Tests Company Responses to Carbon Costs" at Barringer portrays the effects of the auctions upon individual companies and industries
The Morning Star Company’s three plants in California emit roughly 200,000 metric tons of carbon dioxide into the atmosphere each year — about the same amount as the Pacific Island nation of Palau — as they turn tomatoes into ketchup, spaghetti sauce and juice used by millions of consumers around the world.  Beginning Jan. 1, under the terms of a groundbreaking California environmental law known as AB 32, Morning Star and 350 other companies statewide will begin paying for those emissions, which trap heat and contribute to global warming.  Companies are trying to figure out how this will affect their bottom lines and have lobbied state regulators to minimize the costs. In the meantime they are weighing their options. Should they stay and adapt or move operations elsewhere? Should they retrofit and innovate to reduce emissions? Should they swallow the regulatory costs or pass them on to customers?  Each company’s calculus depends on its particular circumstance. Morning Star, a top producer in a $926 million industry, has to be near the tomato fields of California’s Central Valley, so relocating was never an option. Its biggest question is how to handle the extra costs.  For the 200,000 metric tons of carbon dioxide emitted annually by Morning Star’s three plants, the company is being awarded about 192,500 free allowances the first year; the company must buy the remainder on the open market. In the first allowance auction in November, the allowance price settled at $10.09 a ton, meaning in the first year Morning Star has to pay roughly $75,000 to cover its emissions.  But over the next five years, the number of free allowances will decrease sharply to encourage further emissions cuts. At current rates, that means Morning Star will have to buy 100,000 allowances for both 2017 and 2018, by which time the prices may have doubled or tripled in an open market. The company estimates the law will cost it an extra $20 million over the next seven years.  Nick Kastle, a company spokesman, said it would almost certainly pass on the new costs to makers of ketchup and frozen pizza, which would be likely to share the extra costs with consumers. “People nationwide are going to be affected by AB 32,” he said....
About 600 facilities with hefty emissions are covered by the Global Warming Solutions Act of 2006. Oil refiners, electric utilities and cement makers, whose greenhouse-gas output totals in the millions of metric tons annually, are the biggest. But over all, dozens of industries are affected.  In recent months, as the start date of the new cap-and-trade program neared, California regulators have fine-tuned the rules, industry by industry, to avoid imposing severe economic hardship while trying to keep the rules stringent. It is a delicate balance. Regulators do not want California companies to lose their competitive edge, because that could make other state governments reluctant to adopt this approach.  Cement plants near Los Angeles compete with plants across the Arizona border. State tomato processors control more than 95 percent of the American market, but they fear that the fast-growing Chinese sector could make inroads.
But many economists said they think such a cost-centric analysis ignores the jobs and economic activity that the law could generate. Emission and efficiency standards for cars, buildings and appliances in California over the last four decades have succeeded in cleaning the air, making residents’ per-capita energy use rate among the lowest in the country and spurring innovations and new industries, like the one that arose around catalytic converters.  It’s almost a Darwinian point,” said Matthew Kahn, an economist at the University of California, Los Angeles. While some companies’ costs will no doubt rise, he said, the law creates moneymaking opportunities by forcing a rethinking of industrial processes.

For some industries, the options are limited. Cement cannot be made without releasing carbon dioxide as a byproduct, although engineers are trying to reduce the amount emitted. At least one new California company is experimenting with a process that captures and stores carbon that would otherwise be emitted.  Morning Star, praised for its management innovations, has also won respect for improving its energy efficiency through equipment retrofits over the years.... To run the conveyor system and to heat and sterilize the product, the plant uses five boilers, the newest of which is four years old and the oldest.... Replacing a boiler costs millions of dollars.

California Air Resources Board
Press Release dated November 19, 2012

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