Bloomberg News

California Regulators Approve Design for Carbon Trading System

October 21, 2011

(Run BMAP 98124 <GO> to locate oil refineries and power plants in California.)

Oct. 21 (Bloomberg) -- California air regulators approved the final design for what will become the country’s first economy-wide program to regulate greenhouse gas emissions.

The Air Resources Board approved 252 pages of rules governing how the state will cut carbon emissions from power generators, oil refineries and industrial plants roughly 15 percent by 2020. The plan will now be reviewed by the state Office of Administrative Law.

Futures for California carbon allowances were trading at $18 per ton as the air board met to vote, according to CME Group Inc.’s Green Exchange in New York. The program’s approval may firm up prices, draw more players into the market and test whether carbon trading in the U.S. can demand high enough prices to drive emissions reductions.

“This is the most important experiment for the rest of the country to watch,” Ann Carlson, faculty director of the Emmett Center on Climate Change and the Environment at the University of California, Los Angeles. “It’s less about California and more about what an impressively designed program can prove to the country.”

California Design

California regulators spent three years designing rules for the cap-and-trade program, so-named because it will cap carbon emissions and allow companies to trade pollution permits to comply. The final design draws from the successes and failures of several other government programs regulating pollution, including carbon markets in Europe and the U.S. Northeast.

“We designed a program that avoids all the pitfalls we saw,” Stanley Young, a spokesman for the air resources board in Sacramento, said before the board’s vote. “There was no concerted effort to stop this cap-and-trade program in its tracks, and that only comes after a lot of thought and discussion.”

The air board’s staff held 46 public meetings and individually reviewed and responded to 1,710 comments to come up with the final design approved today, Young said.

Under the rules, California will supply allowances, each permitting the release of one ton of carbon, through a combination of free allocations and auctions. Allocations will start at 90 percent of industries’ recent emissions levels and gradually shrink, from a peak of 394.5 million in 2015 to 334.2 million in 2020, to force emissions reductions.

Required Permits

Large industrial sources such as power plants and oil refineries must hold a permit for every ton of carbon they release beginning Jan. 1, 2013. Transportation fuel distributors will follow in 2015.

The market for California carbon permits is already months in the making. The Atlanta-based IntercontinentalExchange Inc. and Green Exchange started clearing futures and forwards for California carbon allowances in August, and London-based Barclays Plc has been making a market in California allowances since Nov. 17.

“The passage of the rule should increase liquidity as a result,” Patrick Pfeiffer, senior broker for BGC Environmental Brokerage Services, said of the board’s approval. “With greater regulatory certainty we expect prices will firm up.”

Carbon Offsets

Bank of America Corp. bought an option earlier this month to acquire several million tons of carbon offsets designed to comply with California’s program through 2020. Companies may use offsets, or credits from carbon-reducing projects, to cover up to 8 percent of their emissions.

“ARB’s vote to adopt the final draft of the cap-and-trade regulation marks a critical turning point in the development of the California emissions market,” said Abyd Karmali, Bank of America Merrill Lynch’s global head of carbon markets. “Market participants are already gearing up their preparatory activities in anticipation of the first allowance auction.”

The state plans to sell nearly half of allowance permits, including ones that electric utilities are required to put up, during the first auctions next August and November.

-- With assistance from Mark Chediak in San Francisco. Editors: Dan Stets, Charlotte Porter

To contact the reporters on this story: Lynn Doan in San Francisco at ldoan6@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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