State and US Regional Policies

Auction Day in California

The first allowance auction for California's carbon cap-and-trade program is set for today. This will be the first economy-wide carbon allowance auction in the US, and is the product of a long policy (and legal) process. California's carbon market will be the world's second-largest (after the EU ETS). RFF's Dallas Burtraw participated in the program's design, and wrote an optimistic op-ed yesterday for the Sacramento Bee about the program and the auction.

Several successful emissions trading programs already exist. After a career of studying these programs, I find the California program will be the best-designed program in the world to date, and is likely to influence the design of emerging programs in Australia, South Korea and even China. . . .

[F]ollowing the recommendation of a group of economists and other experts who served as an advisory committee to the state in 2010, California's program has a central role for an auction. In some previous programs, all of the emissions permits were given away for free. However, since permits can be sold in the market they have value, and firms can be expected to charge their customers for the use of permits by passing through their value in the price of electricity and other products. The result can be an increase in revenues for the firm that greatly outstrips the increase in costs, resulting in unfair profits.

To avoid this problem, other programs . . . have moved to the use of an auction to distribute emissions permits. An auction has other advantages as well. It is transparent, so it helps expose potential market manipulation. It also makes the decision about the allocation of permit value explicit, hopefully leading to more efficient and equitable outcomes that are worthy of public support.

In related news, a lawsuit was filed yesterday by the California Chamber of Commerce alleging that the auction violates California law forbidding new taxes without a 2/3 vote of the legislature. At Legal Planet, Ann Carlson has some initial thoughts on the merits of the suit, and Sean Hecht speculates that the real motivation for the last-minute filing is market manipulation through FUD.