California carbon market launches, permits priced below expectations

SAN FRANCISCO Mon Nov 19, 2012 4:56pm EST

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SAN FRANCISCO (Reuters) - California's largest greenhouse gas emitting businesses paid $10.09 per metric tonne (1.1 ton) for the right to release carbon, raising almost $300 million for the cash-strapped state and its energy companies in its first-ever carbon permit auction,

The permit price was below market expectations despite strong demand from utility companies, manufacturers and oil refineries participating in the auction, market sources said.

Ahead of the California Air Resources Board announcement on Monday, traders, brokers and analysts had predicted a clearing price in the range of $11.75 to $12.50 a tonne.

"The clearing price was below expectations but total participation was higher than most expected from vintage 2013," said Jeff King, managing director of environmental markets at Scotiabank.

All of the 23.1 million permits offered at the auction to cover 2013 emissions were bought, raising $233 million. The money will be given to the state's utility companies, which must use it to protect ratepayers.

The California carbon auction is a key component of the state's cap-and-trade program, the first of its kind in the country. State officials hope it will serve as a model for other states and the federal government.

The program is part of a broader effort to reduce Californian emissions to 1990 levels by 2020 -- about a 15 percent reduction, compared to business-as-usual forecasts.

The permit sale was held on November 14 and announced Monday. It is a crucial step ahead of the cap-and-trade program's official start on January 1, 2013.

"By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future," Mary Nichols, chairwoman of the board, said in a statement.

"That means new jobs, cleaner water and air -- and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient."

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Compliance entities -- companies directly affected by the state's carbon caps -- bought around 97 percent of the allowances. Financial institutions bought the remaining 3 percent, the board said.

The state also auctioned 39.5 million permits that cover 2015 emissions but only sold about 5.6 million allowances.

Demand for those permits was weaker than expected, and those allowances cleared at $10.00/t, the lowest price allowed under the program's rules.

The $55 million raised by the sale of those allowances will be deposited into the state's newly minted Air Pollution Control Fund.

The money from the permit auction must be used to fund clean energy projects and energy efficiency programs, although details on how exactly the money should be spent needs to be hammered out by the state legislature.

Nichols said she wasn't surprised that not all of the 2015 allowances were sold given the large number of permits offered.

On the eve of last week's auction, the state's largest business group, the California Chamber of Commerce, filed a lawsuit challenging the state's right to sell allowances and keep the profits.

Although the state is giving 90 percent of the program's allowances away for free to covered businesses at the outset of the program, the group said all of the permits should be handed out freely, which would negate the need for the state's quarterly permit auctions.

Nichols told reporters on a conference call the lawsuit had "no impact" on the auction.

During its first two-year phase, the cap-and-trade program will cover 350 businesses representing 600 facilities, including power plants, cement-making facilities and oil refineries.

Banks and other financial institutions are also allowed to participate in the auction, although there are limits to the number of permits any one entity can hold.

Trade of CCA futures contracts, which have been traded on the IntercontinentalExchange since August 2011, were quiet in the run-up to the auction results.

Prior to the announcement, CCAs for 2013 emissions were bid at $10.25 with an asking price of $14, a wider than usual spread, with no trades seen, one trader said.

Ahead of the auction results announcement, traders and brokers said they expected the secondary market price for allowances to quickly align with the auction clearing price.

(Reporting By Rory Carroll; Editing by Bob Burgdorfer and David Gregorio)

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