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Mistake in First California Carbon Auction Raises Questions About Secrecy

| February 19, 2013
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Regulators monitor carbon auctions from a "secure, windowless" room at the CalEPA building in Sacramento. (Photo: Craig Miller / KQED)

Regulators monitor carbon auctions from a “secure, windowless” room at the CalEPA building in Sacramento. (Photo: Craig Miller / KQED)

California’s cap-and-trade program to cut greenhouse gases resumed this week with its second auction of carbon allowances to industrial polluters. The market is being closely watched around the world, and billions of dollars are at stake. But some nagging questions are lingering from the first auction.

The state’s first-ever carbon auction last November was a very exclusive online event, open only to bidders and regulators at the California Air Resources Board (CARB). Four days later, Mary Nichols, who heads the board, declared it a resounding success, saying the auction came off “without a hitch.”

“Hundreds of participants were trained at every stage of the process, including how to register and how to bid,” Nichols told reporters in a victory-lap news conference. “And it all worked just as we had hoped it would. “Well, not quite “all.” One of the biggest players in the auction encountered a rather sizable hitch that Nichols never mentioned. More than a than a month later, Bloomberg reported that one of California’s largest utilities, Southern California Edison, had inadvertently bought about 40 percent more permits than it intended. Bloomberg said it obtained internal documents revealing that Edison bidders had used “the wrong format” to submit its bid.

Some market players have expressed concern that the $16 million mistake overstated the real demand for carbon permits and set the price for carbon artificially high (“settlement” price of the first auction was about nine cents higher than the $10 floor price). It was a gaffe that ensured the auction would sell out, and a “hitch” that was never made public by regulators.

“There’s a security aspect to it,” CARB spokesman Dave Clegern explained in an interview a few days before the first auction. He said there’s a reason for the tight lid on bidders. About a week after the Bloomberg story appeared, and KQED made its inquiries, the Air Board put out a stern “reminder” of the rules prohibiting bidders from talking about the auctions.

“If we had had more transparency, it would’ve become much more quickly clear what had happened.”

Clegern went on to say that, “We are simply trying to let the market take its course without being flooded with misinterpretation or rumors or anything like that, that might cause spikes that are unrealistic and unnecessary.”

Neither Edison nor the Air Board would talk with us about this particular incident. The current rules prohibit it. And at a recent workshop on “information sharing” from the cap-and-trade program, it was clear that the Air Board is taking it seriously.

“Even statements such as, ‘We were unable to purchase as many allowances as we would’ve liked,’ are related to strategy and bid quantity, so those are also prohibited,” intoned CARB official Rajinder Sahota, who manages monitoring of the cap & trade program. The state releases general information about each auction — like the total permits offered and purchased — but there’s a strict gag order on all market participants when it comes to what individual companies are bidding and buying.

“If it comes to our attention that those kinds of discussions are occurring and that information is being shared,” Sahota warned attendees, “ARB will investigate, because at face value they are a violation of the regulation.”

Some large corporate cap-and-trade players are still arguing for less disclosure. But other observers say, generally, more is better.

“By increasing the transparency, increasing access to data, then people can start to realize that it’s not a shell game,” said Tim O’Connor, who’s been closely watching California’s carbon market for the Environmental Defense Fund. “It’s a legitimate tool for reducing emissions.”

This concept of “transparency” is crucial to public confidence, especially in California, where memories are still raw from the late ‘90s, when manipulation of the electricity market sent utility bills soaring, put PG&E into bankruptcy, and helped unseat Governor Gray Davis.

UC Berkeley energy economist Severin Borenstein says that this time around, “If we had had more transparency, it would’ve become much more quickly clear what had happened.” Borenstein is on an independent market assessment committee that has argued for more “transparency” in the carbon markets. But he says it’s still a bit unclear where to draw the line.

“I think that they are still in the process of developing policy on this,” he said. “Certainly in the long run I would want to see them be more transparent and certainly allow more public discussion among stakeholders.”

Most of the experts we spoke with agree with Borenstein that overall, the market seems to be working. Since its launch in November, the price of California carbon has gone up, which is the right direction for emissions to eventually come down. The minimum bid for today’s auction has been raised, from $10 to closer to $11 per ton of carbon. Futures have been trading in the mid-teens.

And Borenstein says it’s not unusual for new markets to start with a hiccup or two. “The market is not gonna launch smoothly on Day 1. Markets never do,” he explained. “It’s gonna require adjustments. And so the screw-up in the first auction, for instance, is one that I don’t anticipate will happen again.”

The question remains: if it does happen again, and it does affect the market price of carbon credits in California–who will know?

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Category: Environment, Science

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About the Author ()

Craig is KQED's science editor, specializing in weather, climate, water & energy issues, with a little seismology thrown in just to shake things up. Prior to his current position, he launched and led the station's award-winning multimedia project, Climate Watch. Craig is also an accomplished writer/producer of television documentaries, with a focus on natural resource issues. Reach Craig Miller at cmiller@kqed.org.
  • Canvasback

    How do we analyze a market without information? The secrecy must be a cover for how little the CARB knows about what it’s doing. In a November 2012 article “Calif. Chamber of Commerce Sues . . ” linked above, CARB estimated that about $1 billion could be raised from the sale of allowances in fiscal year 2012-13. About 23 million allowances
    will be sold at around $10 each. Huh?

    The FCC gives the results of it’s auctions – bidders, prices, payments, refunds, etc.

    CARB’s system, by contrast, is a breeding ground for favoritism and error. And it sort of flies in the face of the legal responsibility of full disclosure for investments (since they are already selling futures).

    • marque2

      Not allowing public discussion is 1: probably illegal, and is also designed to keep critics from pointing out the untenable nature of the auctions. These things tend to just shift the polution. Eg in Europe where they instituted strict carbon controls, they basically sell polluting factories to folks in India and China. Factories are expanded in those countries which produce the “polluting” resources there and export back to Europe. Europe then looks like it is saving on pollution, but the reality is it is just being shifted to two countries exempt from most pollution protocols.

      How much pollution will be saved with these credits when people and jobs move to Nevada and Texas? Well in CA it sure will look good, but nationwide it will be the same. The jobs/people will have just moved to a more business friendly environment.

      Good news though, USA is the only country exceeding the Kyoto protocol CO2 limits – but it is doing this by replacing coal with now cheap Natural gas, which emits 50% less CO2 per energy unit produced than coal.

  • http://www.facebook.com/people/Charlie-Peters/100001008562611 Charlie Peters

    I’m confused are some credits free? 510-537-1796

    • Craig Miller

      To start, 90% of the credits were free, given away to cushion the
      initial impact of the program on prices. Also, utilities get free
      credits but are required to sell them back onto the market. Proceeds are used to offset any increases in electricity prices. By 2015,
      most analysts seem to agree that more than half of the permits will be auctioned off.

  • http://www.facebook.com/people/Charlie-Peters/100001008562611 Charlie Peters

    Audit the Federal Reserve & Vinod Khosla.

  • http://www.facebook.com/people/Charlie-Peters/100001008562611 Charlie Peters

    Mary Nichols AB 32 opinion

  • http://www.facebook.com/people/Charlie-Peters/100001008562611 Charlie Peters

    Is CA using Brazil sugar ethanol at a premium of $0.16 per gallon so
    Valero is shipping GMO corn ethanol to Brazil? Is SHELL also moving on
    the CA natural gas electric market that the people pay at double the
    national rate? So is CA funding export of energy profit? 510-537-1796

    • marque2

      Doubtful. It is more likely that pipelines have not been created to transport the extra NG from North Dakota, and Pennsylvania, over to the west coast. You might want to talk to the President about that, and his policy to stop most interstate pipelines, rather than mindlessly bashing the oil company who would like nothing better than to sell more product.