Auction Day in California

The first allowance auction for California’s carbon cap-and-trade program is set for today. This will be the first economy-wide carbon allowance auction in the US, and is the product of a long policy (and legal) process. California’s carbon market will be the world’s second-largest (after the EU ETS). RFF’s Dallas Burtraw participated in the program’s design, and wrote an optimistic op-ed yesterday for the Sacramento Bee about the program and the auction.

Several successful emissions trading programs already exist. After a career of studying these programs, I find the California program will be the best-designed program in the world to date, and is likely to influence the design of emerging programs in Australia, South Korea and even China. . . .

[F]ollowing the recommendation of a group of economists and other experts who served as an advisory committee to the state in 2010, California’s program has a central role for an auction. In some previous programs, all of the emissions permits were given away for free. However, since permits can be sold in the market they have value, and firms can be expected to charge their customers for the use of permits by passing through their value in the price of electricity and other products. The result can be an increase in revenues for the firm that greatly outstrips the increase in costs, resulting in unfair profits.

To avoid this problem, other programs . . . have moved to the use of an auction to distribute emissions permits. An auction has other advantages as well. It is transparent, so it helps expose potential market manipulation. It also makes the decision about the allocation of permit value explicit, hopefully leading to more efficient and equitable outcomes that are worthy of public support.

In related news, a lawsuit was filed yesterday by the California Chamber of Commerce alleging that the auction violates California law forbidding new taxes without a 2/3 vote of the legislature. At Legal Planet, Ann Carlson has some initial thoughts on the merits of the suit, and Sean Hecht speculates that the real motivation for the last-minute filing is market manipulation through FUD.

About Dallas Burtraw

Dallas Burtraw is one of the nation’s foremost experts on environmental regulation in the electricity sector. For two decades, he has worked on creating a more efficient and politically rational method for controlling air pollution. He also studies electricity restructuring, competition, and economic deregulation. He is particularly interested in incentive-based approaches for environmental regulation, the most notable of which is a tradable permit system, and recently has studied ways to introduce greater cost-effectiveness into regulation under the Clean Air Act.

About Nathan Richardson

Nathan Richardson is a visiting fellow at RFF and an assistant professor at the University of South Carolina School of Law. A lawyer by training, Nathan's research focuses on energy and climate policy, particularly regulatory tools available under US law.

Views expressed above are those of the author. Resources for the Future does not take institutional positions on legislative or policy questions. All information contained on Common Resources is intended for informational and educational purposes and may only be used for these purposes. Please see RFF's Terms of Use for further information.

One Response to “Auction Day in California”
  1. Simon Friedrich says:

    It appears the Californian cap and trade system exempts biofuels emissions?

    All greenhouse gas emissions resulting from human activities (transportation, commerce, industry,agriculture, land use, etc.) need to be part of the system. Planck’s radiation law does not exempt greenhouse gases from biofuels. Whatever economic or social good the biofuels exemption provides Californians, it still does not provide a useful example to the rest of the world. Seven billion humans using biofuels as a substitute for fossil fuels does not mitigate our global warming problem. Steven W. Running, A Measurable Planetary Boundary for the Biosphere Science Vol 337, 21 September 2012 provides a basis for my previous sentence.

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