California Cap and Trade Auction #2 Results

by Manatt, Phelps & Phillips, LLP
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Last week, the California Air Resources Board (CARB) held its second Cap and Trade Allowance Auction (auction) of the program, and the first one since carbon obligations started accruing January 1 for compliance entities.  These allowances, which are needed to comply with the Cap and Trade program, sold for $13.62 per metric ton.  This is a 35% increase from what they sold for at the first auction last November.  CARB released the results of the auction on Friday. 

Now that two of these auctions are complete, what does it mean for California, for businesses, and for the Cap and Trade program?  The answers to the most relevant questions are provided below.

When was the auction?  February 19, 2013.

How many more auctions are there?  There are four auctions per year through 2020.

When is the next auction?  May 16.  Subsequent auctions will occur on the twelfth business day of the second month of each calendar quarter.

How many allowances sold?  And at what price?

        2013 Vintage  
  Number offered: 12,924,822
  Number sold: 12,924,822
  Settlement Price:   $13.62
  Percentage of vintages sold: 100%
     
  2016 Vintage  
  Number offered: 9,560,000
  Number sold: 4,440,000
  Settlement Price: $10.71
  Percentage of vintages sold: 46%


What is a vintage?  As the name of the program suggests, there is a yearly cap on the number of GHG emissions allowed under the program.  The "vintage" of an allowance associates it with the year in which it was issued.  The 2016 vintage allowance cannot be used for compliance until 2016 and are referred to as "future vintages."

How much money was raised?  The auction raised over $223 million.

Where do the funds go?  The funds will be divided up depending on the source of the allowance.  A total of $84 million will go to a fund that the State Legislature and Governor will appropriate.  Those funds are associated with allowances given to industrial sources of GHGs.  The rest of the money will go to a fund at the CPUC, as the remainder of the allowances were associated with electrical generation.

How will the money be spent?  This is a question that is partially answered at this point in the program.  The CPUC has an open proceeding to determine how the funds should be distributed.  The State portion of the funds is the subject of ongoing workshops, the development of an investment plan, and finally appropriation by the Legislature.  Stay tuned.

How may entities participated?  It is not known who actually participated in the auction, but statistics released by CARB showed that over 90 entities signed up as eligible bidders.

Who purchased allowances?  88% of the allowances purchased were from entities needing to comply with the program.  The remaining 12% were purchased by banks and other third parties.

What is a Hirschman-Herfindahl Index (HHI), and why is it important?  The HHI is a measure of the concentration of allowances purchased by winning bidders relative to the total sale of current vintage allowances in the auction.  It is a measure of the relative distribution of purchased allowances among entities, i.e., it shows if many entities had winning bids, or just a few large buyers dominated the auction.

And the $223,160,075.64 question of "What does it all mean?"  The bottom line is really that the program is steadily moving forward and is being implemented according to its rules.  (Though it should be noted that there is pending litigation on the program's foundational policies that has not yet been heard in court.)  It also shows that the November price of $10.09 per metric ton of GHG seems to be a bargain.  Finally, the budget makers in Sacramento are getting a better sense of how much money is actually going to be collected and available to be spent to further the goals of the program.

The professionals at Manatt are fully engaged in this issue and those issues surrounding California's efforts to reduce GHGs.  For additional information on how this news or additional aspects of Cap and Trade regulatory requirements will affect you, or for assistance participating in CARB's continued rulemaking process, contact Jon Costantino at 916-552-2365 in the Energy, Environment & Natural Resources practice group at Manatt, Phelps & Phillips, LLP.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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