Carbon Market Marches Onward, but Meaningful Investments Remain Stalled

Posted on Tuesday, December 17th, 2013 by

This November, the California Air Resources Board (CARB) released the results of the year’s last quarterly auction of carbon allowances under the statewide cap-and-trade program. These results bring total revenue from the five auctions of state-owned allowances to over $530 million.

The revenue is intended to go directly into the state’s Greenhouse Gas Reduction Fund, which is then to be invested in emission-reducing activities (as mandated by AB 1532). CalCAN successfully advocated that sustainable agriculture be included in the eligible expenditures outlined in AB 1532 and the administration’s subsequent three-year investment plan.

However, to the disappointment of CalCAN, Governor Brown decided to lend the first $500 million in revenue to the state’s General Fund earlier this year and has not yet presented a timeline for repaying the loan. CalCAN and allies have been calling on the governor to return the $500 million and to commit to allocating all future revenue into climate solutions. The effort recently took the form of a letter signed by over ninety stakeholder groups, addressing the governor’s plans for the upcoming 2014 budget proposal.

By way of context: revenue accumulated through the cap-and-trade program is meant to go towards activities that help meet the emissions reduction targets of AB 32, California’s 2006 Global Warming Solutions Act. AB 32 pledged to reduce carbon emissions to 1990 levels by the year 2020 and designated CARB as the regulatory agency responsible for implementing the legislation. The cap-and-trade system, which uses market mechanisms to reduce greenhouse gas (GHG) emissions, is one of the programs under the climate law.

Cap-and-trade sets a limit on total greenhouse gas emissions across the state. Polluters covered by the law – right now, large-scale entities emitting over 25,000 tons/year – must reduce their emissions. If unable to reduce emissions sufficiently, businesses have to buy extra permits or offset credits enabling them to pollute above their designated caps. These permits, also known as carbon allowances, function as the cornerstone of the cap-and-trade market. (For more on the California carbon market, click here).

Allowances are pollution ‘permits’: one allowance licenses a company to emit one ton of carbon dioxide equivalent. At regular intervals, businesses must turn in the number of allowances equal to the number of tons emitted. Companies falling under the cap can sell the permits they don’t use, and those emitting over their limit have to compensate by purchasing extra allowances or offset credits.

In 2013, CARB distributed 90% of carbon allowances at the beginning of the year, with the remaining 10% to be sold at the quarterly auctions. In the recent November auction, allowances for both 2013 emissions and 2016 emissions (‘advance’ allowances) were up for sale. Advance allowances sold out entirely, indicating bidders’ confidence in the market’s longevity. 2013 allowances sold at a settling price of $11.48, higher than the minimum bid price of $10.71.  Total proceeds from the sale of state-owned allowances reached almost $140 million.

The year’s final auction also occurred not long after a significant legal victory for the program, in which the California Supreme Court upheld the state’s right to auction carbon allowances. Meanwhile, the California market will soon be expanding further, officially joining forces with Quebec’s cap-and-trade program at the start of 2014.

After numerous challenges and delays, it looks as though the California cap and trade program is here to stay. But to preserve its integrity and effectiveness, Governor Brown must recognize agriculture’s critical role in tackling climate change – and put those auction proceeds to work accordingly by investing in farmland conservation and sustainable agricultural solutions.

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