Barclays, NRG Make First California Cap-and-Trade Deal

Barclays Plc and NRG Energy Inc., the largest U.S. independent power producer, have completed the first deal for carbon-dioxide permits under California’s planned cap-and-trade program for greenhouse gases.

Under terms of the trade announced today, permits or carbon allowances will be delivered in December 2012, said Kedin Kilgore, head of U.S. emissions trading for London-based Barclays. The state’s cap-and-trade program begins in 2012 for utilities and manufacturers and in 2015 for cars and trucks. Eventually, 85 percent of California emissions will be covered.

The most populous U.S. state is moving ahead with its program to curb global-warming gases after federal cap-and-trade legislation championed by President Barack Obama stalled in Congress this year. Republicans and some Democrats called the plan an energy tax in disguise.

“California is the eighth-largest economy on the planet,” Kilgore said in an interview. “Trying to cover and reduce 85 percent of the emissions in California is significant.”

Kilgore declined to say whether Princeton, New Jersey-based NRG was a buyer or seller in the deal, or the price of the permits traded.

California pollution permits for delivery in December 2012 were offered today at $11.50 a ton, according to Eric Klein, director of coal and environmental markets at broker Tradition Financial Services in New York.

‘Live Market’

“There’s a live market,” Klein said in an interview. “We’re pretty much going to go forward in California.”

The permits, each representing one metric ton of carbon dioxide, may cost $15 to $30 each by 2020, according to an analysis from the California Air Resources Board, the agency that will run the program.

“We do not believe market fundamentals will begin to support increased carbon pricing until we see the broader economy begin to improve,” Kilgore said.

The trading program is authorized under California’s Global Warming Solutions Act, which requires the state to cut its greenhouse gases to 1990 levels by 2020. The agency’s 11-member board will meet Dec. 16 to decide whether to approve the cap-and-trade plan.

This month, voters in California rejected a ballot measure backed by oil refineries that would have suspended the global-warming law signed by Republican Governor Arnold Schwarzenegger.

Oil refiners Tesoro Corp., Valero Energy Corp. and Flint Hills Resources LLC, a subsidiary of Koch Industries Inc., helped fund efforts to delay the law through a proposition on the Nov. 2 ballot. The measure, which would have suspended the law until California’s unemployment rate is cut by more than half, was defeated with 62 percent of voters opposed, according to state election records.

Gates, Brin, Doerr

Supporters of the global-warming law, including Microsoft Corp. founder Bill Gates, Google Inc. co-founder Sergey Brin and venture capitalist John Doerr, raised more than $30 million to campaign against the ballot measure with radio, television and print advertising.

The program will cover almost 400 million metric tons of carbon dioxide from power plants, factories, refineries and the tailpipes of cars and trucks once fully phased in by 2015. That’s more than double the emissions covered by a carbon market for power plants in the U.S. Northeast, called the Regional Greenhouse Gas Initiative, and almost one-fifth the current size of Europe’s cap-and-trade program, according to data compiled by Bloomberg.

State-Run Auctions

By 2015, refiners in California would probably have to buy permits in state-run auctions and would be able to pass on higher costs to consumers, the air resources board said in a report last month. Gasoline prices may increase 4 percent to 8 percent if permits are priced from $15 to $30 each, the agency said in a report. If carbon allowance prices climbed to $75 each, gasoline prices would be 19 percent higher in 2020.

Higher fuel prices “may induce some consumers to switch to smaller vehicles that are both more fuel-efficient but less expensive than the larger vehicles chosen without cap-and-trade,” according to the agency’s economic analysis. Others may respond by driving less, the agency found.

California will try to expand its carbon market by persuading other U.S. states and some Canadian provinces to set up similar cap-and-trade programs, which could be linked, the air resources board said in its report.

“Lower transaction costs and market efficiency are the best tools for managing carbon risk,” Brannen McElmurray, director of environmental commodities at NRG, said in a statement.

Farms, Forests

California’s cap-and-trade program would also let companies buy a limited number of offsets, which are pollution cuts from unregulated sources such as farms, instead of state-issued carbon allowances.

U.S. forests, farms that capture methane from livestock manure and projects that destroy ozone-depleting industrial gases, such as hydrochlorofluorocarbons used in refrigeration, would be the approved sources of carbon offsets at the beginning of the cap-and-trade program, the air resources board said last month.

Schwarzenegger announced partnerships yesterday with state governments in Brazil and Mexico to protect tropical rainforests that store large volumes of carbon. The partnership aims to create an additional source of offsets -- saving tropical rainforests in developing countries -- that companies can use in California’s carbon market, Schwarzenegger said in a statement.

(Updates with carbon offsets starting in 19th paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE