September 22, 2014

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September 19, 2014

California Cap-and-Trade Program Marches Forward

California’s cap-and-trade compliance obligations became binding on January 1, 2013, culminating six years of regulatory proceedings. Although the California Air Resources Board (CARB) deemed the first auction for emission allowances in November a success, revised statistics revealed that two-thirds of all bids submitted were disqualified. In other recent developments, the state’s Public Utility Commission (CPUC) announced how revenues from the auctions will be allocated, and CARB (the program administrator) set the stage for emissions-offset projects. The second allowance auction is scheduled for February 19.

Authorized by the Global Warming Solutions Act of 2006, California’s cap-and-trade program aims to reduce the state’s greenhouse gas emissions to 1990 levels by 2020,a modest goal given the state’s numerous other initiatives aimed at reducing emissions. Approximately 75 participants, comprising utilities to large financial institutions, were authorized to bid in the first auction; all 23 million allowances offered for 2013 compliance were purchased. 

CARB initially reported that 3.1 bids were submitted for each available allowance, but later issued a statement that just 1.06 “qualified bids” were submitted for each allowance. According to CARB, only qualified bids are used in the settlement process, and “a very small number of participants exceeded their purchase limit, holding limit, or bid guarantee.” Bloomberg News cleared up the ambiguity when it reported in December that one of the state’s investor-owned utilities (IOU) had erroneously submitted approximately 72 percent of all bids due to an apparent misunderstanding of the bid format. As a result, this IOU bought 40 percent more allowances than it needed, even though most of its bids were disqualified.

The state’s electric utilities, including municipal utilities, are allocated free allowances. However, the IOUs are required to consign all of their allowances to auction, with the proceeds remitted to ratepayers. For 2013, those revenues will be at least $650 million, and could total more than $22 billion by 2020.   In late December, the CPUC announced that these revenues will be distributed to certain industrial users that emit less than 25 MTCO2e per year, small businesses (which are defined based on their electricity consumption), and residential customers. The CPUC also determined that it was not appropriate to use auction revenues for energy efficiency or clean energy programs at this time, but part of its reasoning was based on its own administrative processes. It encouraged parties to propose increased funding for efficiency and clean energy in other “appropriate proceedings.”

Also in December, CARB approved two organizations to review carbon-offset projects and issue offset credits. These organizations will use CARB-approved methods of accounting to determine emissions reductions for four types of projects: forestry, urban forestry, dairy manure digesters, and destruction of ozone-depleting substances. A covered entity can use offsets to comply with up to eight percent of its obligation.

Finally, the second auction for 2013 allowances is scheduled for February 19 and has a January 22 application deadline. The reserve price is $10.71, which is slightly higher than the first auction based on a predetermined formula. More than twice as many 2013 allowances will be up for auction as compared to the November auction.

© 2014 McDermott Will & Emery

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