California’s Third Cap And Trade Auction Sells Out, At Record Price

Seems like someone forgot to tell California that cap and trade was dying an untimely death.

California and US flag image via Shutterstock

The state’s third carbon allowance auction was held last week, and businesses snapped up all available 2013 permits, setting a record price level in the process. In addition to the 2013 permits, over three-quarters of advance allowances for 2016 were sold to businesses.

With just over six months left until California links up to Quebec’s cap and trade market through the Western Climate Initiative, the system’s growing strength is apparent and stands as yet another example of how the EU Emissions Trading System’s collapse isn’t the end of cap and trade.

Permits Selling Out, For Record Prices

The May 16 auction was California’s third, and sold more than 14.5 million allowances for $14 per ton. Permit prices have continued their brisk rise, increasing from $10.09 in the first auction held November 2012 to $13.62 in the second auction held in February 2013. Every auction held to date has sold out of all current allowances offered.

While the price for advance allocations covering emissions in 2016 held steady at the market floor price of $10.71 per ton compared to those sold in February, the volume dramatically increased compared to previous auctions. The system has never sold more than half of its advance allocations.

Following the auction, California allowances were trading up at $14.50 on the IntercontinentalExchange secondary market.

Roughly 50 million allowances have now been sold through the auctions, raising $256 million for clean energy investments in California, and $556 million for the state’s largest utilities to protect ratepayers from energy bill price hikes.

Keep Directing Revenue Toward Clean Energy

However, California’s market revenue has become controversial in recent weeks, perhaps a victim of its own success. Governor Jerry Brown has proposed borrowing $500 million from current and future cap and trade revenue to help balance the state’s general fund budget. By law, allowance auction revenue is supposed to be directed toward either reducing emissions or increasing clean energy investments with a specific 25% carve-out for disadvantaged communities.

California green jobs growth image via EDF

The California Air Resources Board, which manages the system, is considering how it directs revenue in its draft investment plan, and data indicates it would be wise to continue steering revenue toward the clean economy.

A recent report from the Environmental Defense Fund found investments in the state’s clean energy sector added jobs up to 178% faster than other economic sectors since 1995. In addition, California’s green jobs were more resilient than the economy as a whole, either growing or remaining stable during periods of overall job losses.

And Here Come The International Linkages

But while cap and trade has been a boon for California, its success may be about to spread. After a short delay, the system is set to link with Quebec’s cap and trade market on New Year’s Day 2014, a step that could help build the growing global carbon market.

In a recent interview, Quebec’s environment minister not only indicated the linkage would create new demand and keep allowance prices high, but also hinted the system had learned from Europe’s mistakes and would eventually link with new carbon markets outside of North America.

Critics continue to lament EU price failures as evidence of cap and trade’s impending doom, but I just don’t see it. At what point will the growth of carbon trading in California, the US Northeast’s Regional Greenhouse Gas Initiative, South Korea, China, and even countries as remote as Kazakhstan turn the tide of opinion?