The merchandise sold about as cheaply as possible, yet the auctioneer couldn't have been more pleased.
California's oil refiners and other big industrial polluters paid just $10.09 a ton for the right to emit greenhouse gases in the state's first-ever carbon auction, state officials said Monday.
The price was just pennies above the $10 minimum set by the California Air Resources Board. But board chair Mary Nichols said the auction, which kicked off California's "cap-and-trade" carbon market, was an unqualified success.
The auction was held last Wednesday.
Nichols said the closely watched results released Monday showed California could put a price on greenhouse gas emissions without having the cost to businesses spiral out of sight.
"Our goal is to reduce carbon at a good price," she said.
Big business groups remain hostile to the state's decision to auction off carbon allowances at any price.
A low price "doesn't make it any less illegal," said Loren Kaye of the California Foundation for Commerce and Education, an affiliate of the California Chamber of Commerce.
The chamber sued the state last week in a last-minute challenge to the auction, saying it amounts to an unconstitutional tax.
The chamber says it supports the goal of reducing carbon emissions but believes the state should give away all the allowances for free.
While the first auction went on as scheduled, the chamber's lawsuit is aimed at halting future sales.
The state will hold auctions every three months, and the sales are expected to generate upwards of $1 billion a year in revenue.
One of the auction purchasers, a Southern California oil producer named Signal Hill Petroleum Inc., said it remains wary of the market.
"It's a tax that just ripples through to everybody in California," said Dave Slater, chief operating officer. He declined to say how much Signal Hill spent.
While the price of carbon is low for now, Slater said it could soar in future years, the way wholesale electricity prices in California erupted without warning in 2000.
"It's another expense that our competitors outside the state don't have to pay," said Brett Guge of California Steel Industries Inc. in Fontana, another purchaser of credits.
He warned: "The cost will go up as times go on."
The centerpiece of AB 32, the state's answer to climate change, cap-and-trade works this way: California has set a ceiling on total carbon emissions, with the cap declining slightly each year.
Affected polluters have been given 90 percent of their carbon allowances for free and have two main options for dealing with the remaining 10 percent.
They can reduce emissions or buy the necessary credits, either from the state or on private, secondary markets.
Outside experts said the first auction appears to have worked.
"It definitely seems like a reasonably healthy market," said Lenny Hochschild, a carbon trader at Evolution Markets in San Francisco.
He said it was noteworthy that every single allowance sold out more than 23 million tons of carbon. "That's a lot of volume to be purchased," he said.
Environmentalists were pleased with the auction, saying a relatively low price on carbon doesn't undermine the goal of reducing greenhouse gases.
"It's the cap that is driving the environmental outcome," said Nat Keohane, a vice president with the Environmental Defense Fund. "The auction was successful in setting a fair price."
Companies bid as much as $91.13 a ton for allowances in the auction, but it was designed so purchasers could buy at the lowest price that exhausted the supply.
The average bid price was $13.75.
"We weren't trying to sell to the highest bidder," Nichols said. The goal was "to get the allowances sold to the people who need them."
Nichols said 97 percent of the credits were purchased by the industrial users that need them to comply with the law, as opposed to speculators or traders.
The state released a list of qualified bidders but wouldn't disclose who had actually purchased credits.
A separate auction, for credits to be used in 2015, was less successful. Barely 5.5 million of the 39.5 million allowances were sold, at the minimum $10 a ton. But Hochschild said those results were of little concern.
Around $290 million was spent in total on the two auctions.
It's expected the auctions will raise a total of $1 billion a year, with the cost escalating in 2015. That's when refiners will have to buy additional credits to account for the greenhouse gases emitted by California cars and trucks.