California Carbon Futures Slip as State Sells Allowances

California carbon futures fell 2 percent yesterday as the state auctioned its first greenhouse-gas allowances, brushing aside a lawsuit challenging its authority to start the largest U.S. cap-and-trade program.

The state Air Resources Board offered 23.1 million carbon allowances for the first phase of trading beginning Jan. 1 and 39.5 million for the second phase starting in 2015. Each permit allows the release of one metric ton of carbon. The California Chamber of Commerce filed suit Nov. 13 against the auction, calling it “an unconstitutional fee.”

California carbon futures fell to a new low yesterday as investors waited for the state to disclose on Nov. 19 how many permits were sold and the price paid. The program covers 85 percent of emissions in an economy valued at $1.74 trillion last year. California is giving away about 90 percent of allowances in the first phase and auctioning the rest in what will be the second-biggest carbon market, after the European Union program.

“We’re not likely to see any significant price movements between now and when we find out what the results of the auction are,” Lenny Hochschild, head of global carbon trading for Evolution Markets, said by telephone from San Francisco yesterday. “Prices are slightly down, but it’s so slight that I’d say the market reaction to the lawsuit has been muted.”

Futures Prices

Futures contracts based on carbon permits for 2013, the first year of compliance under the program, fell 25 cents to $12.15 a metric ton yesterday, according to data compiled by CME Group Inc.’s Green Exchange in New York. Permits are down 40 percent from this year’s high of $20.25 on July 24.

“Supply was pretty healthy, and it’s unclear how many buyers are interested in getting in,” Gary Stern, director of market strategy and resource planning for Edison International in Rosemead, California, said by phone yesterday. “So there’s potential that the market will be soft for those reasons.”

Edison’s Southern California Edison utility submitted bids in yesterday’s auction, he said.

Jon Costantino, a senior adviser with law firm Manatt, Phelps & Phillips LLP in Sacramento and previously climate-change planning manager at the California Air Resources Board, said before the auction started that participants might “think twice” about buying permits because of the chamber’s lawsuit.

“There is definitely concern, especially among those who are active in the carbon market,” he said.

Expected Prices

Permits for the first compliance period were expected to clear between $12 and $15 a ton in yesterday’s auction, according to Bloomberg New Energy Finance. The state air resources board won’t release the number of units sold or the price paid until after the results are reviewed by a market monitor and certified by the agency.

“With no pricing information being revealed today, it’s not surprising that the market tone hasn’t changed,” Samantha Katz, managing director at BGC Environmental Brokerage Services LP in New York, said by phone after the auction ended.

California plans to cap carbon emissions beginning next year from power generators, oil refineries and other industrial plants. The limit will decline each year to achieve a 15 percent reduction in emissions by 2020. Companies must surrender carbon permits to cover their emissions over three phases of the program. Those that discharge less than their cap can sell their spare allowances.

Lawsuit Arguments

The Chamber of Commerce argued in its lawsuit that the air board lacks authority to sell carbon allowances, saying it’s paramount to an invalid tax costing taxpayers $70 billion.

The board is “confident that the cap-and-trade program will withstand any court challenge,” Stanley Young, a spokesman for the panel in Sacramento, said by e-mail Nov. 13.

Market liquidity has already been “crippled by buyer and seller hesitation to sign forward contracts,” Thomas Marcello, a Bloomberg New Energy Finance analyst in New York, said in a research note Nov. 8.

Some permits for the second phase are expected to go unsold as fuel suppliers wait to stockpile credits, he said.

The EU will auction most of its emission permits starting next year after giving away the majority of each year’s allocation since 2005. Australia plans its first carbon auction in 2014.

California Governor Jerry Brown, Oregon Governor John Kitzhaber, Washington Governor Christine Gregoire and British Columbia Premier Christy Clark issued a joint statement as the auction was under way stressing the need for a price on carbon. British Columbia adopted a revenue-neutral carbon tax in 2008.

The group, which met in San Francisco this week at the GreenBuild 2012 conference, described California’s program and British Columbia’s tax as “two examples of tools that help more accurately price energy resources and continue the transition to a 21st century energy infrastructure.”

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