California Auctions Initial Greenhouse Gas Allowances under AB 32 Cap and Trade Program

by Wilson Sonsini Goodrich & Rosati

On November 14, 2012, the California Air Resources Board (ARB) held the first auction for greenhouse gas (GHG) emission allowances under the state's pioneering cap and trade program. More than 70 entities participated in the auction, and bids ranged from the price floor of $10 to over $90. In total, the ARB sold more than 23 million allowances, each representing a metric ton of carbon dioxide equivalent that may be emitted by a covered entity. The auction represents the first time that a price for permits to emit greenhouse gases has been set in California.

California's Cap and Trade Program

In 2006, the California legislature passed the Global Warming Solutions Act (AB 32), setting a state-wide goal of reducing GHG emissions to 1990 levels by 2020. As part of the implementation of AB 32, the ARB approved a "cap and trade" program to set numeric limits on certain industrial GHG emissions while allowing covered entities to trade the rights to emit in the form of emissions allowances. California's cap covers industrial entities that emit over 25,000 metric tons of carbon dioxide per year, which includes approximately 350 entities and 600 facilities. These covered entities were initially granted 90 percent of their emissions allowances without charge, allocated based on historical emissions, while the remaining 10 percent must be purchased via auction. Companies must hold allowances sufficient to cover their emissions over a compliance period. Companies may also use offset credits generated from emission reduction activities to cover up to 8 percent of their compliance obligation. This initial auction sold allowances for both the 2013-2014 and 2015-2017 compliance periods.

Allowance Auction

Auction participants must either be covered entities, companies that have opted to be covered by the system, or voluntarily associated entities. Entities may opt into the cap and trade program if they would otherwise be covered but emit below the annual thresholds. Voluntarily associated entities may also participate in the cap and trade program in order to trade or retire allowances. Ninety-seven percent of the allowances sold at the November 14 auction were purchased by covered entities.

At the November 14 auction, the ARB sold allowances at the lowest market clearing price and mandated a reserve price of $10 per allowance. During the auction, entities submitted sealed bids for a quantity and price of allowances. On November 19, the ARB released results from the auction showing a market clearing price of $10.09 for the 2013 allowances period and the reserve price of $10 for 2015 allowances. One hundred percent of the available 2013 allowances were sold, while only 14 percent of the available 2015 allowances were sold. The auction raised $289 million in proceeds, which will be used to offset customer electricity rate increases resulting from the implementation of the cap and trade program. The ARB will continue to hold auctions on a quarterly basis.

Lawsuit Filed

On the eve of California's first allowance auction, the California Chamber of Commerce filed a lawsuit in Sacramento Superior Court challenging the ARB's auction of emissions allowances. Instead, the Chamber asserts that emissions allowances should be allocated to covered entities for free. The Chamber's complaint also asserts that the auction represents a tax levied without the needed approval of two-thirds of the legislature.

For More Information

Wilson Sonsini Goodrich & Rosati assists clients in navigating and conducting transactions under California's AB 32 cap and trade system and other complex energy regulatory regimes. If your company is interested in learning more about California's cap and trade system, carbon offset transactions, or any related issues, please contact Peter Mostow, Randy Lewis, Sheridan Pauker, or Josh Bushinsky in the firm's energy and clean technology practice.

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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