Results: The Bright Side of Getting Into a Routine

By: Erica Morehouse, Senior Attorney, and Katie Hsia-Kiung, High Meadows Research Fellow

1440893210_4bf8520f5c_zWhat do we call regularly occurring activities? A routine. Which, let’s face it, can sometimes feel tired and uninteresting. But other times, getting into a routine can mean good things. When you get an all-clear at a check-up with the doctor or dentist, you’re not disappointed, right? Well, here’s another example of a smooth routine: as of May 28, we’ve now chalked up 11 auctions that have taken place as part of California’s cap-and-trade program. And the latest results tell us yet again that a good routine is just what the doctor ordered.

The auction results released today reflect a stable and healthy carbon market, in line with results we’ve seen consistently over several of the past quarterly auctions. (Click here for background on how the auctions work under cap-and-trade). One hundred percent of the allowances offered – which can be used for compliance as early as this year – were sold in the current auction, at a price of $12.29, 19 cents above the minimum floor price set by the California Air Resources Board (CARB). This is only eight cents above the price per allowance seen at the last auction, and the lack of any significant price movement from auction to auction is indicative of the stability and maturity of the market. It also shows that companies are becoming more comfortable with the requirements of the cap-and-trade regulation. To date, none of the current vintage allowances offered in the California auctions have gone unsold.

In addition, approximately 94 percent of future vintage allowances, which can be used for compliance starting only in 2018, were purchased in this auction at the floor price of $12.10. With a strong showing of demand for these future vintage allowances, as well as the very slight rise in prices as compared to the last auction, it’s worth noting several recent announcements that have raised expectations about the program’s longevity. Governor Jerry Brown recently issued an executive order setting California’s emission reduction target at 40 percent below 1990 levels by 2030, further establishing the state as a leader in taking action on climate change. In addition, last week, California signed the “Under 2 MOU (Memorandum of Understanding)” with 11 other states, provinces, and countries.  Through this MOU each state or province committed to either reduce their greenhouse gas emissions by 80 to 95 percent below 1990 levels by the year 2050 or achieve a per capita annual emission target of less than two metric tons by 2050. One of the signatories to the MOU was Ontario, Canada, which also recently announced that it would be establishing its own cap-and-trade program, with the intention of joining California and Quebec’s linked market.

Two weeks ago, California also got an important reminder about the critical role auctions play in the strong design and ultimate success of the cap-and-trade program. Seventeen economists from around the world signed onto an amicus curiae (“friend of the court”) brief to oppose a legal challenge – led by the California Chamber of Commerce and some other business interests – on the use of auctions within the cap-and-trade program. This latest legal challenge is an appeal of a 2013 lower-court decision in which the Sacramento Superior Court decided that auctioning carbon allowances was within the Air Resources Board’s authority and did not constitute an illegal tax under California law. Briefing is now almost complete in the appeals process, and the economists’ brief is notable for highlighting three major reasons why including an auction component in an emissions trading program has been a favored strategy of most economists since trading programs began in the 1990s:

  1. Auction systems are more equitable. Auctions promote equity in several ways. First, they avoid “windfall” profits, when polluters are able to unfairly profit from allowances that they didn’t have to pay for. Instead, in California, at least a quarter of all proceeds from the auctions go to reducing pollution and delivering health and economic benefits to disadvantaged communities overburdened by socioeconomic and pollution challenges. Auctions also promote equity among businesses by providing a transparent and accessible forum for any business to purchase allowances regardless of their size or expertise with the private market.
  2. Auctions systems are more transparent and economically efficient. One of the benefits of a carbon market is that businesses only need to buy an allowance if they can’t reduce pollution on site for less. In order to make this decision effectively businesses need information about the going price of reducing a ton of emissions, the price of an allowance. Public auctions allow better access to this information than relying only on the private two-party transactions that constitute “trading” without an auction. This promotes economic efficiency by ensuring all participants know and are able to pay for the true value of an allowance.
  3. Auctions further environmental benefits. Buying an allowance at auction places a clear price on carbon pollution that cannot be ignored and incentivizes innovation and on-site pollution reduction. Even if allowances are given away for free, each ton of pollution carries a theoretical price, but for a business still acclimating to a carbon market or not properly factoring the carbon price into its business planning, this theoretical price is easier to ignore. A clearer carbon price can mean a more direct path to reductions and achievement of environmental goals.

The analysis offered in the economists’ brief, taken together with the real-life experience of 11 successful California auctions so far, provide a wealth of examples and evidence for any government to draw upon when designing their own set of climate policies. And, judging from the many cities, states, and provinces lining up side-by-side with California to make bold climate commitments, well-designed cap-and-trade programs might be just the routine we’ve all been looking for.

Photo source: Flickr/David Schott


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