On November 14, California’s Air Resources Board (CARB) will conduct the first greenhouse gas (GHG) allowance auction as part of the state’s cap-and-trade program. Earlier this month, CARB issued two notices, one identifying the deadlines between now and November 14 and the other explaining financial requirements for participation. Compliance obligations for the electricity industry and some industrial facilities start in 2013, and CARB estimates that sources responsible for 85 percent of the state’s current emissions will ultimately be covered by the program. Although this new market is the first of its kind in the United States, given the declining GHG emissions in California over the past few years, the program’s goals are relatively unambitious.

Authorized by the Global Warming Solutions Act of 2006, California’s cap-and-trade program is intended to reduce the state’s GHG emissions in 2020 to 1990 levels. Its first phase covers facilities generating electricity, importers of electricity, and large industrial sources, such as facilities used for fossil fuel extraction or refining, mining and manufacturing. Initially, only sources that emit more than 25,000 tons of CO2 equivalents per year are required to participate. In 2013, approximately 90 percent of allowances will be distributed for free to electric generators and operators of industrial facilities based on their most recent emissions. In 2015, distributors of petroleum, natural gas and other fuels will also be required to hold GHG allowances, as will many stationary sources that emit less than 25,000 tons of CO2 per year. In addition to covered entities, financial institutions and other intermediaries are allowed to participate in auctions and trading.

In 2007, CARB set the 1990 baseline (and 2020 goal) at 427 million metric tons (MMT) per year and estimated that the 2020 business-as-usual forecast would be approximately 600 MMT. With that estimate, the 2020 goal represented a decline of about 30 percent. While GHG emissions increased slightly from 2000 to 2007, they dropped sharply in 2009, roughly at the same rate as national GHG emissions fell in the wake of the recession. As a result, in 2010, CARB reduced its 2020 business-as-usual scenario from 600 to 508 MMT. With the new estimate, the 2020 goal represented a decline of 15 percent compared to the business-as-usual scenario. This updated estimate, however, did not account for California’s increase in its renewable portfolio standard target from 20 percent by 2010 to 33 percent by 2020, or for new state and national vehicle efficiency standards. CARB estimates that these measure alone would more than account for the difference between today’s actual emissions and the 2020 goal. 

California has long been a pioneer in energy regulation. In 1996, for example, the state legislature restructured its electricity industry, becoming the first in the country to rely on market-bidding to procure power and services for its electric grid. Two years after the markets opened, prices soared, FERC declared the market structure to be seriously flawed, and California scrapped the original market design and tried again. Today, it is considered a model market for policy makers.

California may see this initial cap and trade program as an experiment and a stepping stone towards meeting the far more ambitious goal of reducing emissions to 80 percent below 1990 levels by 2050, a goal that was set in an executive order issued by Governor Schwarzenegger. It remains to be seen how much this cap-and-trade program will cost (or how much revenue it will generate for the state, depending on your perspective), or how effective the market design will be, but it appears that it will do little to reduce GHG emissions.