State Air Board Holds Firm: AB 32 Auction Will Take Place in November as Planned and Designed.

by Susan Frank, Director, California Business Alliance for a Green Economy

On Thursday, September 20, the California Air Resources Board (CARB) held its monthly meeting where the Board heard an update on implementation of the state’s landmark climate and clean energy law, AB 32. Hundreds of supporters and opponents filled the auditorium, some hoping for action by the Board to slow down the AB 32 process and others, including the California Business Alliance for a Green Economy, urging CARB to stay the course.

Despite a successful recent test run of the online exchange for carbon allowances and an impending January 1, 2013, launch for California’s cap and trade program, CARB continues to face pressure from oil companies and other regulated entities attacking the auction component of AB 32. Arguing that all of the carbon allowances should be given away for free, groups such as the Western States Petroleum Association (WSPA) and the California Manufacturers and Technology Association (CMTA) maintain the standard rhetoric that jobs will be lost, businesses will leave California, and the economy will shrink. Discrediting this economic “burden” argument is the fact that only 10 percent of the allowances will actually be auctioned off in the first auction, while the other 90 percent will be distributed for free.

“The fact is that outside the electric utilities, who are subject to a different regulation, no business has to participate in the auction,” reiterated CARB Chairman Mary Nichols in her opening statement at the Board hearing. Further highlighting CARB’s genuine concern for businesses and the economy, Nichols noted that, “over the past five years ARB has met with members of the industrial sector hundreds of times, and developed, with them, an approach where we provided 90 percent of the allowances for the first years to help with the transition.”

Remember that AB 32 handily survived a 2010 ballot measure, which challenged the law’s existence. Despite that, the regulated opposition continues to try to delay, derail and ask for more, knowing that any change in the allowance percentage would send CARB back to the drawing board, thus delaying the auction. Fortunately, the Board is holding firm and the cap and trade auction is on track for November.

So how does an auction work? Think of it like an initial public offering (IPO) of a company. In this case the citizens of California are the private owners of a business (carbon), CARB is the underwriter of the IPO (carbon allowances), and the polluting entities are the initial buyers of this stock. These entities can hold on to their shares (carbon allowances) for future use, or pollute less than their allotted allowances and sell the remainder on the stock exchange (newly created carbon exchange).

In a joint letter this past August to Governor Brown signed by over 55 state and national economists and economic experts, the case for an auction is made clear:
“In theory, it does not matter to the environmental integrity of the program whether allowances are auctioned or given away for free. In reality though, once real-world conditions are introduced, the difference matters. These conditions include transactional costs, unfair market power, uncertainty, and other industry market behaviors that can introduce inefficiencies into perfectly functioning markets.”

An unfortunate fact is that businesses receiving free allowances will often find a way to pass the allowances’ market value on to the consumer as a cost, despite the fact they received them for free. This happened with the European Union’s wholesale electricity market, which subsequently had to be changed to an auction system. On the surface, the business argument that an auction is too much of a financial burden may seem to ring true, but digging a little deeper shows the economic fiction behind this argument.

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