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California Begins Cap and Trade Auction

California ushers in a new era today with one of the the first greenhouse gas emission auctions in the United States. The state passed the Global Warming Solutions Act in 2006, and six years later, the cap and trade program on carbon emissions in the law is operational and ready for action.

More than six years in the making, the state’s so-called cap-and-trade program sets limits on carbon dioxide emissions for virtually all sectors of California’s economy, the ninth-largest in the world. Emissions allowances are allotted to polluters, and companies whose emissions exceed their allocations must either obtain extra allowances or buy credits from projects that cut greenhouse gas emissions.

Almost all of the 23.1 million allowances that California has given out to utilities and industry for complying with the program in 2013 have been free; the auction will measure how they are actually valued by the market. Some 39.5 million allowances covering emissions in 2015 will also be on sale Wednesday.

Sealed bids can be submitted over the Internet in the three-hour auction, with the results to be announced on Monday.

Giving away the pollution credits for free leaves a lot of money that could go into global warming mitigation programs on the table. However, the plan is to gradually sell the credits, as well as ratchet them down, over time. In addition, polluters who need more credits will have to seek them on the private market from colleagues with excess credits. So they’ll end up paying, even if they don’t pay California.

Results with other cap and trade programs have been mixed. Europe has seen a glut of carbon allowances, though the system has improved over time. And the Northeast has a regional carbon allowance system, though it’s far more modest than California’s.

The California Chamber of Commerce filed an 11th-hour lawsuit to block the auction. However, the suit did not include a preliminary injunction, so it won’t stop today’s proceedings immediately. The suit claims that the auction constitutes a new tax, and because the Global Warming Solutions Act, or AB32, did not get a 2/3 vote of the legislature, which is required for revenue increases, it’s unconstitutional in California. Here are a pretty decent pair of responses:

The first is that it is unclear whether the auction even constitutes a tax: regulated parties with compliance obligations, many of whom are allocated allowances for free, need not buy the allowances. Indeed conceivably all of the allowances could be purchased by a non-profit environmental group and retired in order to keep an emitter from purchasing them in order to emit more greenhouse gases. Moreover an emitter subject to a compliance obligation under the cap-and-trade program could cut its emissions rather than purchase allowances at auction to cover emissions. Thus the auction could be viewed as akin the selling off of state property, not the levying of a tax. If the auction is not a tax, the lawsuit should be dismissed.

Second, AB 32 grants CARB significant discretion in designing policies to cut the state’s greenhouse gas emissions. The legislature clearly contemplated cap-and-trade as one of those measures and indeed included language in AB 32 authorizing “market mechanisms” to cut emissions.

If the state courts agree, the auctions will continue as scheduled.

Given that cap and trade, or really any legitimate price on carbon, is a dead letter at the federal level, this system in the nation’s largest state represents the best alternative.

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David Dayen

David Dayen