Author Archives: Jonathan Camuzeaux

The Nuts and Bolts of California’s First Greenhouse Gas Auction

This article was originally posted at California Dream 2.0.

 

Following today’s California Air Resources Board’s (CARB) board meeting, the next major milestone in California’s efforts to reduce greenhouse gas (GHG) emissions is on November 14th, when California will hold the first auction of carbon allowances for the Global Warming Solutions Act (AB 32) cap-and-trade program. EDF has closely followed the steps CARB has taken to prepare, including participating in their successful “practice auction” this past August.  In order to shed some light on the nuts and bolts of how these auctions will work and the process going forward, we’ve put together an Auction FAQ factsheet to help answer some basic questions.

Why is CARB Auctioning CO2 Allowances?

In terms of allowance distribution, the AB32 program includes a combination of free allocation and auctioned allowances.  While it is the cap that ensures that the targeted quantity of emission reductions are achieved – regardless of the choice of type of allowance distribution – there are important differences between auctioning and free allocation relating to issues such as transaction costs, market power, price certainty, and distribution of allowance value.

Perhaps most importantly, auctioning allowances creates proceeds that can be invested in a variety of ways to further the goals of AB32 – for example, financing emission reduction projects in either capped or uncapped sectors, keeping energy prices down, or preparing for the impacts of global warming.  In addition, twenty-five percent of proceeds are actually required to be used in ways that benefit disadvantaged communities.

Another advantage of auctioning CO2 allowances is that it guarantees that all regulated entities have access to allowances on an equal footing. By holding an auction, California ensures that both large and small companies have access to allowances under the same terms, thus reducing the risk that the market becomes dominated by a few big players.

How the Auction Works

The California auction will be using a single-round, sealed-bid, uniform-price format. Under this format, companies submit confidential bids for a specific amount of allowances at specific prices (also called a bid schedule). The highest bidder is allocated their requested quantity of allowances first, then the second highest bidder, etc., until there are no more allowances.  Winning bidders receive the quantity of allowances they bid for at the uniform settlement price, which is determined as the value of the lowest winning bid – or more simply, the price at which the market clears. Regardless of their original bids, all winning bidders pay the same price. This auction format creates a clear market price, which is crucial for investors.

Using Auction Revenue to Further Emissions Reductions

There are abundant opportunities to invest the auction proceeds into sectors that deliver greenhouse gas reductions in California – from clean energy to clean transportation, energy storage and clean tech finance and investment. Not only do these investments further California’s greenhouse gas reduction goals, they can also provide considerable economic benefits, as well as substantial health co-benefits, while helping set California’s path towards sustainable economic growth. To learn more about investing AB32 auction proceeds to grow California’s clean economy, read the EDF Invest to Grow report.

Auctions will play an important role in California’s cap-and-trade program; they encourage a more stable market and create proceeds that can be used to make California’s efforts to cut climate change pollution even more effective. For more details about how the auctions are designed, how the bidding process works and what to expect on November 14th, see EDF’s Auction FAQ factsheet and the California Air Resources Board’s website (here).

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All Systems Go for California’s Carbon Auction!

By Emily Reyna. This article was originally posted at California Dream 2.0.

Last Thursday, California took an important step towards finalizing a major component of the state’s effort to cut climate change pollution, an economy wide cap-and-trade regulation that establishes a price on carbon pollution.  Along with an expert from EDF’s economics team, Jonathan Camuzeaux, I had the opportunity to participate in the first ever public “practice” auction for the Global Warming Solutions Act cap-and-trade program – and it was a runaway success.

The goal of yesterday’s practice was to test the new online exchange where users will be able to bid on "carbon allowances" starting in November of this year.

EDF decided to submit the paperwork to be among the first users to test the new auction system since there is a lot riding on the cap-and-trade program working. Once fully operational, California’s cap-and-trade market will introduce the most cost-effective way to reduce climate pollution, protect public health, and spur clean tech innovation.

Here's how it worked:

During the practice auction we walked through a checklist of 33 tasks EDF designed to test the functionality of the system. What we found was that the auction system run by the California Air Resources Board (CARB) works much like other secure websites, such as that of an on-line bank or retailer.  Users sign in with a secure username and password and during the pre-determined open hours (bidding window), bidders place an order for as many emissions allowances as they want to buy, though only a certain number will actually be sold.  Bids from other organizations are rightfully kept private and hidden from view – making this a “sealed-bid” auction platform that is based on the system designed and currently in use in North America’s other cap-and-trade program for greenhouse gas (GHG) pollution in the Northeast.

During the bidding window, users were free to modify or rescind bids.  Once the bidding window closed all bids were final.  Since yesterday was only practice though, no money was actually exchanged or allowances sold once the bidding ended.

Our assessment:

From top to bottom, the AB 32 cap-and-trade auction system was easy and straightforward to use. Though we witnessed a few minor annoyances – such as being able to upload multiple bids at one time but only being able to delete one at a time – all of the market critical aspects were running well from our vantage point.  The next step will be for CARB to evaluate the bids and determine which are accepted and rejected based on the publically available market rules.

In all, after three hours of testing, our consensus is that the system works, and works well. California is ready to launch a new era of innovation, job creation, and economic stability. It is inspiring to see California taking climate action, and we believe success here will inspire other states, regions, and nations to develop similar climate programs.

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