At California’s inaugural auction of greenhouse gas allowances last week, bidders bought all 23.1 million allowances for 2013 emissions sold at $10.09 per ton, a few significant cents above the floor price of $10. The price and relatively high demand for the allowances -- with the state receiving three times as many bids as allowances available for sale -- bodes well for the fledgling market.   There is clearly more interest in the California market than for RGGI: the $10.09 per ton price is over five times the price garnered at the latest RGGI auction ($1.93), and three times higher than the highest ever RGGI price ($3.51 from March 2009). Although some of that effect is due to the fact that California set its floor price much higher than RGGI (currently $1.93), the real reason is one of supply, rather than demand. Through both intentional regulation and careful science, the California cap was set much lower than the RGGI cap (now estimated to be nearly double what 2012 emissions will actually total).    

The results for the California auction’s sale of 2015 vintage allowances, only 14% of which sold for the floor price of $10 per allowance, paint a more mixed picture of the market’s view of the program’s staying power.  On one hand, some allowances sold, despite the fact that they cannot be used to cover emissions until 2015 or later, while, on the other hand, California’s required escalation of the floor price by inflation plus 5% each year means that these allowances were quite a bargain at this preview auction, so some were predicting a stronger showing. Uncertainties such as legal challenges to the cap and trade program and auction structure are likely to blame for such hesitancy within the market. 

According to market results, 97% of the 2013 allowances were bought by companies that will face the state’s carbon cap beginning in January. The remaining 3% of 2013 vintage allowances and 9% of the 2015 allowances purchased sold to investors, traders or other speculators. Under California’s rules, utilities received from the state enough allowances to cover their historical emissions and contracts with outside energy providers, but had to put those allowances into the auction and buy back however many they deem necessary to cover their future emissions.  

Now that even this preview auction has raised nearly $300 million, the question is what to do with all that money? The California Public Utilities Commission announced a proposed division of the funds from the auction -- paying 85% of auction revenues to ratepayers through twice annual rebates, 10% to small businesses, and 5% to help industries whose out of state competitors are not subject to regulation by the program. By using the tool of rebates, CPUC hopes to preserve the carbon price signal to provide incentives for businesses and individuals to reduce greenhouse gas emissions, but still soften the bottom-line impact on consumers.  

Rebates are fine, and the California experiment may prove successful. However, perhaps the most significant lesson from RGGI is that the real emission reductions come from strategic investment, not the cap itself.  A report released by RGGI on Monday highlights that the $617 million that the nine participating states invested in energy efficiency improvements, renewable energy generation, energy bill assistance and adaptation to the impacts of climate change between 2009 and 2011 will result in 12 million fewer tons of carbon dioxide emissions (the equivalent of taking 2 million passenger vehicles off the road for one year), and return an estimated $1.3 billion in lifetime energy savings for consumers and businesses.