Air Board Likely to Give Away Most Carbon Permits

California’s greenhouse gas regulators may ease the pain for companies under an evolving cap-and-trade plan.

Photo: Craig Miller

A staff report issued today by the state’s Air Resources Board provides the first details of how a state-run cap-and-trade program would work. As regulators had warned in recent months, it appears that most emissions permits will be given away, at least initially. Environmental groups had been pressing for a “100% auction,” making industry pay for all allowances.

But Jamie Fine, an economist with the Environmental Defense Fund in Sacramento,  says it’s not that straightforward. Fine interprets documents released today to mean that most allowances would be given away to begin with, but by 2015, with the gradual expansion of the program, more than half of the permits would be auctioned off.

The program would be implemented in three phases, gradually expanding the type and number of emitters required to comply. During the first phase, beginning in 2012, the total “cap” on covered carbon emissions would shrink from about 166 million metric tons, to under 160 million, over a three-year period. The Air Board has estimated 2008 industrial carbon emissions in California to be in the neighborhood of 170 million tonnes.

“What I see very clearly is that more than half the allowances will be auctioned off by the beginning of phase two,” said Fine. “And that’s a big number.” At the outset of the program, Fine says, “Some of the allowances are going to industrial sources, some are going to the utility sector, some re going to an allowance reserve, and what’s remaining will be auctioned.” The report also establishes a “reserve” price at $10 per ton of carbon. The reserve price is intended to be a floor, if the permit trading market doesn’t support a higher price.

According to an early Bloomberg analysis, the recommendations also double a previous cap for for so-called “offsets,” investing in projects that reduce emissions elsewhere. Offsets have been controversial because it’s sometimes hard to verify that they’re actually having an impact on net carbon emissions.

Air Board chair Mary Nichols said, in a release this morning: “We have worked closely with all interested parties and stakeholders to make sure that the program provides flexibility to reach our emissions reduction goals while taking into consideration the current economic climate and the need to fully protect California’s economy.”

“They seem to have kind of found that sweet spot,” Fine said of regulators, to produce “something that seems to be a pretty impressive balancing act between stringency and a reasonably soft start of the program, that doesn’t lead to industrial operators to panic.”

The cap & trade program — scheduled to go forward in two years as part of California’s greenhouse gas law known as AB-32 — is currently under attack by supporters of Propositions 23 and 26, and by Meg Whitman and Carly Fiorina, Republican candidates for governor and the US Senate, respectively.

The Air Board itself will consider the nearly 500 pages of recommendations in mid-December, just days after the next round of UN international climate talks conclude in Cancun, Mexico.

CORRECTED: In an earlier version of this post, I misinterpreted a section of the CARB staff report to mean that regulators would seek to auction one quarter of the allowances. I regret the error and have revised this post to correct that.