California’s Simulated Carbon Auction Seen as ‘Slam Dunk’

California, the world’s ninth-largest economy, said a trial auction of carbon allowances appears to have gone well today.

Participants found the online system easy to use, the state Air Resources Board, which performed the simulation in preparation for the first real auction of permits on Nov. 14, said in a statement. More than 430 companies regulated under the state’s cap-and-trade program were invited to log into the auction platform and submit bids as part of the trial.

Those who participated in the practice auction described it as a “slam dunk,” Jeff King, managing director of environmental markets at Scotiabank in Toronto, said by telephone from Sacramento. “It was easy.”

The successful trial may signal that California is on track to creating the world’s second-largest carbon market, behind the European Union’s emissions-trading system. Carbon futures linked to the state’s program have dropped from this year’s high on speculation that the first auction, twice delayed, would be put off again.

Futures for December 2013 slipped 35 cents to $16.30 a metric ton, down 20 percent from this year’s peak of $20.25 on July 24, data compiled by CME Group Inc.’s Green Exchange show. Forward contracts had sold for $16.25 and $16.30 a metric ton as of 5:50 p.m. New York time, down from a 2012 peak of $20.10, according to ICE.

“We will be combing the record for every minor glitch we can possibly find to fix, but I am delighted that everything so far shows that the practice auction went well,” Mary Nichols, the air board’s chairman, said in a statement.

Emissions Allowances

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

Companies must turn in enough allowances to cover their emissions, and those under the limit can sell the permits to others above it. The program, divided into three compliance periods that run through 2020, will eventually cover 85 percent of the greenhouse gases released in the state.

While allowances won’t be sold until November, CME Group Inc.’s Green Exchange began offering contracts for the future delivery of permits last August, at the same time that IntercontinentalExchange Inc. began clearing forwards.

Sample Results

The air board doesn’t plan to release a settlement price or the number of allowances sold in the practice auction, according to a pool report. The agency will instead e-mail those who participated in the practice auction sample results on Sept. 4.

The simulation was limited primarily to regulated companies, some state regulators and legislators, and members of the Western Climate Initiative, Stanley Young, a spokesman for the agency, said during an interview in San Francisco Aug. 13. The board selected two reporters, from the Sacramento Bee and Bloomberg BNA, to participate in the trial and report to a larger pool.

Trial participants logged into an electronic bidding system that required them enter a bid price with a minimum bid of $10 an allowance; the number of “lots” desired, each representing 1,000 allowances; and a “vintage” year, corresponding to the compliance phase that the allowances would be used for, according to a pool report.

Electronic System

“It’s about as exciting as paying your bills online,” Dave Clegern, a spokesman for the air board in Sacramento, said by telephone Aug. 22. “There will be no settlement price posted. There will be no final number of participants.”

The first auction of allowances was delayed to Aug. 15 from Feb. 14 while the board fended off a legal challenge to the cap-and-trade system. The auction was delayed a second time in March when Nichols said another three months were needed to prepare.

Carbon futures were trading with “a fair amount of discounting based on some expectations that we’re not actually going to start on time,” Gary Stern, the market strategy director for the state’s second-largest power utility, Edison International’s Southern California Edison in Rosemead, said by phone Aug. 23. Prices should firm up if the trial runs smoothly, he said.

Free Permits

The air board is still facing pressure from some state politicians to issue more free permits instead of selling them at auction. A group of 17 legislators, led by Assemblyman Henry T. Perea, a Democrat, asked Governor Edmund G. Brown Jr. in a letter Aug. 27 to direct the air board to issue more free permits instead of auctioning them.

The state’s nonpartisan Legislative Analyst’s Office said in an Aug. 17 report that California could reduce emissions by issuing all allowances for free, while warning that free allocations may generate “windfall profits” for those running already-efficient plants and eliminate a source of state revenue.

The air board plans to put about 21.7 million metric tons of 2013 permits and 40 million of 2015 permits up for sale in the November auction, Clegern said.

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