California Air Chief Says Carbon Auction Won’t Be Delayed

California plans to sell the first carbon allowances in November, undeterred by warnings from a federal energy commissioner that a system meant to curb emissions may harm businesses, the state air board’s head said.

The agency is on schedule to develop a platform for a Nov. 14 auction of allowances, each allowing for the release of one metric ton of carbon under a state program that caps emissions from plants beginning next year, Chairman Mary Nichols said during an interview at Bloomberg’s San Francisco office.

California carbon futures have tumbled 12 percent from this year’s high on speculation that the auction may be delayed after Philip Moeller, a Republican member of the Federal Energy Regulatory Commission, warned California’s Democratic Governor Jerry Brown on Aug. 6 that the system may “seriously impact” the West Coast economy.

“The chances are overwhelmingly good that we will start on time,” Nichols said in the interview. “We’re in the process of cleaning up every loose end or issue that hasn’t yet been definitively addressed.”

Nichols was scheduled to speak with Moeller today about his concern that a provision prohibiting companies from sending carbon-intensive power outside the state was unclear and would hurt businesses.

California’s cap-and-trade program would create the second- largest carbon market in the world, behind only the European Union’s emissions trading system.

Carbon Allowances

Allowances to be used as part of the state’s program are commanding higher prices than any other carbon permits traded on futures exchanges as regulators develop rules for a system that eventually will cover 85 percent of the greenhouse gases released in the state. It would become the first economy-wide program of its kind in the U.S.

California carbon allowance futures for December 2013 delivery slipped 15 cents, or 0.8 percent, to $17.75 per metric ton today, data compiled by CME Group Inc. (CME)’s Green Exchange shows. Prices are up 13 percent this year and peaked on July 24 at $20.25 per metric ton.

“The market’s on pins and needles about this first auction, hoping it goes smoothly,” Jeff King, managing director of environmental markets at Scotiabank in Toronto, said by telephone Aug. 10. “We’re poring through every seemingly simple announcement looking for any clues to a potential delay.”

Emissions Cap

California plans to cap carbon emissions from power generators, oil refineries and other industrial plants beginning next year and cut that limit gradually to reduce emissions by 2020 to 1990 levels. The air board will issue carbon allowances through a combination of free allocations and auctions.

Companies must turn in enough permits to cover their emissions. Those under the limit can sell allowances to companies above it.

FERC’s Moeller said in the letter to Brown last week that a program rule banning companies from a practice known as resource shuffling isn’t clearly defined and may freeze power-trading in the region. The law is intended to prevent utilities from importing emissions-free power and sending carbon-intensive electricity generation outside the state.

The air board agrees that such a “chilling” effect on the market would be inappropriate and plans to address Moeller’s concerns, Nichols said.

‘Resources Shuffling’

“We don’t think it’s as likely to be a problem as his letter did, and we’re not backing down one inch on the issue of resources shuffling,” she said. “We agree it’s a problem that needs to be addressed, so we will address it.”

The board decided in March to delay the first auction of permits to Nov. 14 from Aug. 15 to test the system and give participants more time to understand the process. The air board had already delayed compliance under the cap-and-trade program by a year, to 2013 from 2012.

More than 400 regulated companies have been invited to participate in what the agency is describing as a practice allowance auction on Aug. 30. The state is prepared to delay the start of the program again should the “stress test” reveal failures in the system, Nichols said.

“We certainly are prepared, or willing, to delay the start of the program if we need to, but it wouldn’t be something we’d do lightly and, as of now, we don’t think that’s going to happen,” she said.

Market Participants

PG&E Corp. (PCG) and other market participants pooled money to run their own market simulations, Fong Wan, PG&E’s senior vice president of energy procurement, said during an interview in San Francisco. Nichols has been very open to that, he said.

“If it’s not ready, I don’t think she will push us to go forward,” Wan said. “Everybody is trying really hard to make it work.”

The air board has already put off a vote that would link the cap-and-trade program with a similar system in Quebec and allow companies to trade carbon permits across borders. Nichols said she expects the linkage to be established by the end of the year once the agency receives approval from Brown.

California is also in talks with the Mexican state of Chiapas about partnering in efforts to reduce greenhouse-gas emissions, Nichols said.

“They are looking at possibilities of working with California, probably not full linkage in a cap-and-trade system, but whether there are ways that they could be recognized in some sort of a market,” she said.

To contact the reporter on this story: Lynn Doan in San Francisco at ldoan6@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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