Capitol Alert

California’s cap-and-trade carbon program sputters again

Food processors, like this Pacific Coast Producers tomato plant in Woodland, are among the California businesses required to participate in the state’s cap-and-trade carbon program.
Food processors, like this Pacific Coast Producers tomato plant in Woodland, are among the California businesses required to participate in the state’s cap-and-trade carbon program. Sacramento Bee file

When California launched its cap-and-trade program four years ago, the unspoken fear was that the price of carbon emissions credits would soar out of sight and bankrupt manufacturers and other industries forced to buy them.

Now cap and trade, a crucial piece in California’s war on climate change, finds itself with exactly the opposite problem: an excess of credits and insufficient demand. The result is a program that’s stumbling badly and facing an increasingly hazy future in the Legislature.

The cap-and-trade market had another bad day Tuesday, with hundreds of millions of dollars worth of unsold carbon credits left over following the latest state-run auction. Only about 30.8 million credits were sold, each one representing a ton of carbon emissions, out of approximately 96 million credits that went on sale. The auction was held last week, but results weren’t released until Tuesday by the California Air Resources Board.

It was the second straight quarterly auction in which scores of carbon credits failed to attract buyers, although there was higher demand this time around. Last spring’s auction ended with roughly 90 percent of the credits unsold.

Environmentalists say cap and trade is still fulfilling its basic role of reducing the amount of greenhouse gases spewed into the atmosphere. But the unsold credits are causing headaches for Gov. Jerry Brown, who has been counting on auction revenue to help pay for a variety of “green” programs, such as the state’s high-speed rail project.

At the minimum price set by the air board – $12.73 a ton – the latest auction raised more than $390 million. But only about $8.4 million will go for programs such as high-speed rail. The rest will go to the state’s electric utilities to buffer their customers from the cost of paying for carbon emissions; the buffer was built into the 2006 law that led to the cap-and-trade program.

California’s program isn’t the only cap-and-trade system that’s run into problems; gluts of emissions allowances have popped up in other markets around the world.

Experts say the California auctions, designed to put a market price on carbon pollution, are sputtering for two main reasons. First, the state’s relatively gradual recovery from the recession has curbed industrial activity and the demand for carbon credits. Second, other state regulations are in place to reduce carbon emissions.

For instance, California’s “renewable portfolio standard” is forcing electric utilities to reduce carbon emissions. That’s reducing the overall demand for carbon allowances on the cap-and-trade market, said Jon Costantino, a senior adviser with the Manatt law firm in Sacramento and a market expert.

“There’s a surplus of allowances,” he said.

Another factor is the program’s uncertain future. Cap and trade is set to expire in 2020, and it’s unclear whether the Legislature will renew it. Separately, several business groups are challenging the constitutionality of the program before the 3rd District Court of Appeal.

The Assembly on Tuesday passed Senate Bill 32, which extends California’s overall fight against greenhouse gas emissions to 2030. But the bill says nothing about cap and trade. Last week, legislative Democrats rebuffed Brown’s plan to include cap-and-trade renewal in SB 32. Lawmakers said the cap-and-trade amendment could complicate efforts to pass the larger bill.

Brown welcomed passage of SB 32 while reiterating his commitment to extending cap and trade beyond 2020.

“Today’s auction results show that the markets need certainty,” said his executive secretary, Nancy McFadden, in a prepared statement. “Shoring up the cap-and-trade program – either through the Legislature or by the voters – will provide that certainty and will continue billions in funding for vital programs, especially in disadvantaged communities with the dirtiest air.” McFadden recently raised the possibility of running a 2018 ballot initiative to extend cap and trade if the Legislature isn’t willing to act.

In the meantime, the program’s long-term uncertainty seems to be affecting food processors, cement-makers and other industrial companies forced to limit their carbon emissions, prompting them to hold off on buying emissions credits for the time being.

“There’s no incentive to buy now,” Costantino said.

Cap and trade, inaugurated in 2012, establishes a statewide ceiling on carbon emissions – a cap that declines slightly each year. Although many of the carbon emissions credits are handed out free, industrial companies generally have to buy a portion of their credits, either on the open market or through quarterly state-run auctions.

Despite the slew of unsold credits, groups such as the Environmental Defense Fund said cap and trade is still worthwhile.

“California’s package of climate programs, including cap and trade, must first be evaluated based on whether emissions are going down – and the latest data from (the air board) showed that emissions do continue to decline,” analyst Erica Morehouse of the Environmental Defense Fund wrote in a note to reporters.

Lobbyists line up for cap-and-trade pork at an Assembly budget subcommittee hearing on April 20. Capitol veteran Gene Erbin seeks a slice, but questions the legality of the program.

Dale Kasler: 916-321-1066, @dakasler

Related stories from Sacramento Bee