Dan Walters

California cap-and-trade emission auctions could face bleak future

Chevron’s refinery in Richmond and other industrial facilities must purchase allowances to emit carbon dioxide via the state’s cap-and-trade program, but uncertainty about its future and a glut of allowances have had a major downward impact on the state’s quarterly auctions.
Chevron’s refinery in Richmond and other industrial facilities must purchase allowances to emit carbon dioxide via the state’s cap-and-trade program, but uncertainty about its future and a glut of allowances have had a major downward impact on the state’s quarterly auctions. Associated Press file

When California’s “cap-and-trade” auction of carbon emission allowances imploded a month ago, it clobbered ambitious plans by Capitol politicians to spend many billions of dollars.

The immediate question was whether the May 16 auction, in which the state realized just 2 percent of the money officials had projected, was a one-time thing or the harbinger of a deeper and longer decline.

The official response from Gov. Jerry Brown’s administration, uttered by Department of Finance official Amy Costa at a state budget hearing, was, “I would caution about reading too much into one auction.”

Since then, analysts of the complex system of auctioning off rights to emit carbon dioxide have concluded that future quarterly auctions are likely to see similarly poor results, citing the legal and political uncertainty about the program’s future and a massive glut of allowances available in the secondary market for prices well below the state’s minimum price.

A lawsuit by business groups contends that the cap-and-trade program is a tax that must be approved by a two-thirds legislative vote, and the underlying 2006 legislation, Assembly Bill 32, is limited to emission reduction goals by 2020, which is fast-approaching.

The Brown administration had contended that it could continue the program after 2020 without further authorization, but it now is signaling that it wants an extension to 2030, with even more ambitious reduction goals.

A bill in the current legislative session, Senate Bill 32, would provide that authority, but after passing the Senate last year, it garnered just 30 votes in the Assembly while needing 41. Moreover, it’s at least possible that any reauthorization would require a two-thirds vote because Proposition 26, passed in 2010, tightened the legal definitions of taxes and fees.

As the legal and political wrangling continues, the glut of emission allowances continues to build.

ICIS, an international energy data authority, calculates that California may have an “oversupply” of available allowances over 250 million tons, or roughly the equivalent of three quarterly auctions.

“The oversupply peaks at about 260 million tons in 2018, but it may take until 2024 before the program comes into balance and the surplus is worked off,” the Carbon Market Compliance Association concludes in its analysis.

Authorities are mulling various strategies to bring the supply of allowances into closer balance with demand, including withdrawing state-owned allowances. But withdrawal or any shrinkage would also make it impossible for the state to realize the $2.4 billion in annual revenue it had forecast from allowance sales.

Brown had proposed a $3.1 billion spending plan, with his pet bullet train project, which otherwise has few financing prospects, designated to get a quarter of the auction revenue.

With the situation in flux and the next auction scheduled in two months, the Legislature passed a 2016-17 budget without making any appropriations from auction proceeds, even money the state had banked from previous auctions.

This is just the beginning of what will be a long saga.

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