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California Carbon Permits Sell Above Expected Clearing Price

California, the second-largest carbon-polluting state in the U.S. behind Texas, sold out of greenhouse-gas allowances put up for auction this week at $13.62 each, more than a dollar above analysts’ expectations.

Units of BP Plc (BP/), Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) were among the companies qualified to buy permits in the Feb. 19 auction, a report posted on the state Air Resources Board’s website shows. Bids ranged from $10.71 to $50.01 per allowance, each permitting the release of one metric ton of carbon. The sale was expected to clear at $12.30 a ton, according to a Bloomberg New Energy Finance analysis.

“It looks clearly like a very healthy auction result, at least on the surface,” Lenny Hochschild, head of global carbon trading for broker Evolution Markets in White Plains, New York, said by telephone.

California’s carbon cap-and-trade system is the largest of its kind in the U.S. and the second-biggest carbon market in the world behind the European Union’s. The state, which cites its program as an example for the rest of the world to follow, plans to use it and other emissions-reduction measures to cut greenhouse-gas pollution to 1990 levels by 2020.

‘Viable’ Market

The auction results demonstrate “a strong, viable carbon market,” Derek Walker, associate vice president of U.S. climate and energy for the New York-based Environmental Defense Fund, said in an e-mailed statement.

California has been a pioneer for thinking big and putting bold policy into action and today is another glowing example of that leadership,” Walker said.

The state sold all 12.9 million allowances it offered on Feb. 19 to be used for compliance this year. It also put up for sale 9.56 million permits to be used in 2016. Of those advance allowances, 4.44 million were bought by companies at $10.71 each, the lowest price allowed by the program.

In these auctions, companies submit confidential bids electronically for a specific number of allowances at specific prices. The highest bidder is awarded permits first, then the second and so on until the all of the permits for sale have been called for. Then all bidders pay the price of the lowest winning offer.

Futures Gain

Futures based on California carbon allowances for 2013 jumped 80 cents, or 5.7 percent, to $14.90 a ton, data compiled by the Atlanta-based Intercontinental Exchange Inc. (ICE) show. A total of 220 contracts, each representing 1,000 permits, were traded, the exchange said.

Futures rose to $15 a ton after the state posted the auction results, up from $14.50 before the release, Hochschild said from San Francisco. Almost 80 percent of today’s trades occurred after the results were released at 3 p.m. New York time, he said.

In the Feb. 19 auction, companies regulated under the state’s cap-and-trade program bought 88 percent of the 2013 permits, which can be used to cover emissions this year. The air board received 2.47 bids for every allowance for sale, the agency’s report shows.

“Obviously, oversubscription of 2.47 times is great,” Dusty Granet, a broker at BGC Environmental Brokerage Services LP in New York, said by telephone. “People are very confident right now. There’s just a positive sentiment.”

The average bid for an allowance was $14.71 a ton, and the median was $12.56, the state air board said.

November Auction

The state sold allowances at its first auction on Nov. 14 at $10.09 a ton, just above the $10 floor price.

The most recent auction results suggest that allowances will “continue to trade at levels well above the auction floor despite the market being fundamentally overallocated,” Thomas Marcello, a Bloomberg New Energy Finance analyst in New York, said by e-mail. Companies looking to hedge against compliance costs are supporting this “price premium,” he 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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