Environment

California’s troubled pollution credit program rebounds

A tanker truck passing the Chevron oil refinery in Richmond, Calif. on Wednesday, Nov. 14, 2012. Oil refineries and other polluters in California can buy and sell pollution credits through the state’s cap-and-trade system.
A tanker truck passing the Chevron oil refinery in Richmond, Calif. on Wednesday, Nov. 14, 2012. Oil refineries and other polluters in California can buy and sell pollution credits through the state’s cap-and-trade system. AP

California’s beleaguered program for limiting carbon emissions and battling climate change showed signs of life Tuesday.

Industrial firms and other companies spent nearly $1 billion buying pollution credits in the state’s latest cap-and-trade carbon auction, the California Air Resources Board announced. About 88 percent of the credits were purchased during the electronic auction, which was held last week, the agency said.

The strong results followed two auctions earlier this year when well over half of the available credits went unsold. That deprived the state of millions of dollars in revenue for various “green” programs that are relying on carbon dollars, including the high-speed rail project. The dismal results also underscored the uncertain future of the cap-and-trade auctions.

With the latest results, “the market certainly rebounded from the uncertainty of the last two auctions,” said Jon Costantino, a cap-and-trade expert at the Manatt law firm in Sacramento. But he said the market hasn’t completely stabilized, and next February’s auction will bear watching.

The cap-and-trade program, the cornerstone of California’s landmark 2006 climate change law, sets a statewide ceiling on carbon emissions each year. Hundreds of food processors, cement manufacturers and other industrial firms are required to buy carbon emissions credits, either through quarterly auctions run by the Air Resources Board or on the open market. Each credit allows the buyer to spew a ton of carbon into the air. Companies can also comply with their limits by simply reducing pollution.

The program seemed to be running smoothly until earlier this year, when purchasers stopped buying. One factor was the relatively slow recovery in the economy, which reduced industrial activity. The other was the state’s “renewable portfolio standard,” which mandates significant reductions in carbon emissions by electric utilities and depresses overall demand for carbon credits.

Yet another factor is a cloud over cap and trade. The program is set to expire in 2020. Although Gov. Jerry Brown signed into law Senate Bill 32, which extends the fight against climate change another 10 years, the legislation leaves the future of the cap-and-trade program somewhat unclear. In addition, a lawsuit by the California Chamber of Commerce and others, challenging the legitimacy of the state auctions, is scheduled to be argued before the state Court of Appeal in January.

Despite those uncertainties, Costantino said purchasers of emissions credits had little choice but to re-enter the market after sitting out the last two auctions. Under a pricing mechanism established by the Air Resources Board, the minimum per-ton price of credits is expected to jump from the current $12.73 to around $13.50.

The latest auction was “the last time purchasers had the ability to buy allowances at the $12.73 price,” said Erica Morehouse, a lawyer who tracks the carbon market for the Environmental Defense Fund.

Although more than $980 million worth of credits were sold, more than half the revenue will flow to the state’s major electric utilities to buffer their ratepayers from the cost of paying for carbon limits. That mechanism was built into the 2006 law.

All told, the auction raised about $360 million for the state’s Greenhouse Gas Reduction Fund, according to the Environmental Defense Fund. The first two auctions this year raised practically no money for the fund.

Dale Kasler: 916-321-1066, @dakasler

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