California has begun the process of distributing and auctioning greenhouse gas emission allowances under its "cap and trade" program. Starting on January 1, 2013, sources subject to the program must have acquired allowances or other compliance instruments (such as offsets) equal to their annual greenhouse gas emissions.

Earlier this summer, the California Air Resources Board ("CARB") introduced its Compliance Instrument Tracking System Service, known as CITSS, which is used to establish accounts to record the holding, transfer, and retiring of compliance instruments for each entity that participates in the program.

The first phase of CITSS was released in July 2012. It enabled participants to register as users of CITSS and to apply for compliance instrument accounts. The second phase was introduced in October 2012 and adds features to manage the movement of compliance instruments into and out of the various accounts.

In addition, CARB has established an auction process to sell emission allowances. CARB held a practice auction on August 30, 2012 to test the auction mechanics and its interface with CITSS. A total of 112 entities bid during the mock auction, and 1,947 bids were submitted.

To participate in the cap and trade program, a regulated entity must have a CITSS account. To establish the account, individual representatives of participants (such as individuals representing sources subject to the program) first must provide requested information to CARB and receive a CITSS User ID. User IDs are issued only to natural persons, not to entities. Approval as a CITSS user and an active User ID enable the individual to apply for CITSS accounts on behalf of the entity that he or she represents. The creation of an account in CITSS requires the completion of an electronic application in CITSS, followed by mailing required information and attestations to CARB. It takes about 10 working days to obtain a CITSS account.

Under Section 95912 of the cap and trade regulations, an entity that intends to participate in an auction must submit a registration application at least 30 days in advance. The application confirms an intention to bid, allows verification of the identity of the representative and the entity he or she represents, and enables the submission of bid guarantee information. Auction applications for the upcoming November 14 auction were due on October 15. Auctions will be held quarterly each year. Entities that did not meet the deadlines associated with the November 14 auction can begin the process for the next auction, which will take place in February 2013.

The distribution and auction of allowances, each of which equals one metric ton of greenhouse gas emissions, will take place in November 2012. On November 1, CARB distributed free allowances into the CITSS accounts of the entities identified in section 95870 of the cap and trade regulations. CARB will hold its first allowance auction on November 14. The auction will take place from 10:00 a.m. until 1:00 p.m. Pacific Time. The minimum number of allowances available for sale during the auction is 21,804,539 in 2013 and 39,450,000 in 2015. The reserve price is $10 for one allowance for both 2013 and 2015 vintages. Bids must be submitted in lots of 1,000 allowances. Bids can be revised or withdrawn during the three-hour bidding window, but once the window closes, no further changes to bids are permitted.

Section 95912 of the cap and trade regulations requires that those bidding at an auction must submit financial guarantee instruments consisting of cash, an irrevocable letter of credit, a bond, or a combination of the three. The amount of the guarantee must be greater than or equal to the sum of the value of the bids submitted by the auction participant. Bid guarantees for the November 14 auction were to be submitted by November 2. There are also limits on the number of allowances an entity or group of affiliated entities may purchase from the allowances sold at the auction, as well as holding limits, which are the maximum number of allowances that may be held by an entity or group of entities with a direct corporate association.

The results of the November 14 auction will be posted on the CARB web site. The public report will include (among other information) the number of allowances that were available and sold at the auction, a list of qualified and successful bidders, and the settlement price of an allowance.