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California Cap-and-Trade Program Marches Forward

by Ari Peskoe

California’s cap-and-trade compliance obligations became binding on January 1, 2013, culminating six years of regulatory proceedings. Although the California Air Resources Board (CARB) deemed the first auction for emission allowances in November a success, revised statistics revealed that two-thirds of all bids submitted were disqualified. In other recent developments, the state’s Public Utility Commission (CPUC) announced how revenues from the auctions will be allocated, and CARB (the program administrator) set the stage for emissions-offset projects. The second allowance auction is scheduled for February 19.

Authorized by the Global Warming Solutions Act of 2006, California’s cap-and-trade program aims to reduce the state’s greenhouse gas emissions to 1990 levels by 2020, a modest goal given the state’s numerous other initiatives aimed at reducing emissions. Approximately 75 participants, comprising utilities to large financial institutions, were authorized to bid in the first auction; all 23 million allowances offered for 2013 compliance were purchased. 

CARB initially reported that 3.1 bids were submitted for each available allowance, but later issued a statement that just 1.06 “qualified bids” were submitted for each allowance. According to CARB, only qualified bids are used in the settlement process, and “a very small number of participants exceeded their purchase limit, holding limit, or bid guarantee.” Bloomberg News cleared up the ambiguity when it reported in December that one of the state’s investor-owned utilities (IOU) had erroneously submitted approximately 72 percent of all bids due to an apparent misunderstanding of the bid format. As a result, this IOU bought 40 percent more allowances than it needed, even though most of its bids were disqualified.

The state’s electric utilities, including municipal utilities, are allocated free allowances. However, the IOUs are required to consign all of their allowances to auction, with the proceeds remitted to ratepayers. For 2013, those revenues will be at least $650 million, and could total more than $22 billion by 2020.   In late December, the CPUC announced that these revenues will be distributed to certain industrial users that emit less than 25 MTCO2e per year, small businesses (which are defined based on their electricity consumption), and residential customers. The CPUC also determined that it was not appropriate to use auction revenues for energy efficiency or clean energy programs at this time, but part of its reasoning was based on its own administrative processes. It encouraged parties to propose increased funding for efficiency and clean energy in other “appropriate proceedings.”

Also in December, CARB approved two organizations to review carbon-offset projects and issue offset credits. These organizations will use CARB-approved methods of accounting to determine emissions reductions for four types of projects: forestry, urban forestry, dairy manure digesters, and destruction of ozone-depleting substances. A covered entity can use offsets to comply with up to eight percent of its obligation.

Finally, the second auction for 2013 allowances is scheduled for February 19 and has a January 22 application deadline. The reserve price is $10.71, which is slightly higher than the first auction based on a predetermined formula. More than twice as many 2013 allowances will be up for auction as [...]

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Coming Soon: California’s First Cap-and-Trade Auction

by Ari Peskoe

On November 14, California’s Air Resources Board (CARB) will conduct the first greenhouse gas (GHG) allowance auction as part of the state’s cap-and-trade program. Earlier this month, CARB issued two notices, one identifying the deadlines between now and November 14 and the other explaining financial requirements for participation. Compliance obligations for the electricity industry and some industrial facilities start in 2013, and CARB estimates that sources responsible for 85 percent of the state’s current emissions will ultimately be covered by the program. Although this new market is the first of its kind in the United States, given the declining GHG emissions in California over the past few years, the program’s goals are relatively unambitious.

Authorized by the Global Warming Solutions Act of 2006, California’s cap-and-trade program is intended to reduce the state’s GHG emissions in 2020 to 1990 levels. Its first phase covers facilities generating electricity, importers of electricity, and large industrial sources, such as facilities used for fossil fuel extraction or refining, mining and manufacturing. Initially, only sources that emit more than 25,000 tons of CO2 equivalents per year are required to participate. In 2013, approximately 90 percent of allowances will be distributed for free to electric generators and operators of industrial facilities based on their most recent emissions. In 2015, distributors of petroleum, natural gas and other fuels will also be required to hold GHG allowances, as will many stationary sources that emit less than 25,000 tons of CO2 per year. In addition to covered entities, financial institutions and other intermediaries are allowed to participate in auctions and trading.

In 2007, CARB set the 1990 baseline (and 2020 goal) at 427 million metric tons (MMT) per year and estimated that the 2020 business-as-usual forecast would be approximately 600 MMT. With that estimate, the 2020 goal represented a decline of about 30 percent. While GHG emissions increased slightly from 2000 to 2007, they dropped sharply in 2009, roughly at the same rate as national GHG emissions fell in the wake of the recession. As a result, in 2010, CARB reduced its 2020 business-as-usual scenario from 600 to 508 MMT. With the new estimate, the 2020 goal represented a decline of 15 percent compared to the business-as-usual scenario. This updated estimate, however, did not account for California’s increase in its renewable portfolio standard target from 20 percent by 2010 to 33 percent by 2020, or for new state and national vehicle efficiency standards. CARB estimates that these measure alone would more than account for the difference between today’s actual emissions and the 2020 goal. 

California has long been a pioneer in energy regulation. In 1996, for example, the state legislature restructured its electricity industry, becoming the first in the country to rely on market-bidding to procure power and services for its electric grid. Two years after the markets opened, prices soared, FERC declared the market structure to be seriously flawed, and California scrapped the original market design and tried again. Today, it is considered a model market for policy makers.

California may see this initial cap and trade program [...]

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Regulated Bidding for Emissions Allowances Under Phase Three of the EU Emissions Trading Scheme

by Prajakt Samant and Simone Goligorsky

The UK’s Financial Services Authority (FSA) published a Consultation Paper (Consultation) on March 15, 2012 detailing its proposals for authorization and supervision of firms intending to bid for emission allowances under Phase Three of the European Union Emissions Trading Scheme (EU ETS).  Phase Three covers the period of 2013-2020 and marks the final phase of the EU’s strategic commitment to a 20 percent reduction in carbon emissions from the levels in the 1990s.

The purpose of the Consultation is to set out the circumstances in which bidding for emissions allowances becomes subject to FSA regulation following amendments to current regulations.  It offers a preliminary guide for firms looking to bid for emissions allowances with a view to allowing as much time as possible for applications for permission to be processed.  The first auctions are not expected until autumn 2012, however the European Commission (EC) may choose to commence auctions on its central platform as early as June 2012.

The UK (alongside Germany and Poland) has opted to host a national platform for EU ETS auctions.  This right is enabled under the Regulated Auction Platform Regulations 2011, which creates in the national platform a Regulated Auction Platform and in turn, a new body subject to FSA supervision.  Bidders will have the choice of two types of emission product available for auction: a two-day spot and a five-day future.  The choice of emission product will play a role in determining whether or not a firm will be subject to FSA regulation.  Amongst others, investment firms and credit institutions are most likely to require FSA authorization to undertake auctioning activities.

Changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 will establish bidding as a new regulated activity, therefore, firms will still be required to make a further application to the FSA even if they currently have permission to carry out existing FSA regulated activities.  It is not, however, anticipated that any variation of a firm’s existing permissions would be unduly complex.  This would be the case unless the FSA considers that the proposed bidding activities will pose any material risk to the firm’s business, since the FSA is of the view that the newly created bidding activity is similar to certain existing regulated activities.

The FSA invites comments by April 19, 2012 with the intention to finalize the proposals set out in the Consultation through rules which are due to be published in late May 2012.  A policy statement and feedback on any responses will be published shortly thereafter.

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