Mystery unveiled, California and how it trades its caps.
"Let the Hunger Compliance Games begin!"
What is California’s Cap and Trade
and what makes California believe it can achieve something the nation could
not? For starters, you may be asking,
what is all the hoopla about cap and trade? Well, the basics of cap and trade
are simple; it uses the power of the marketplace to reduce pollution, in theory
doing so at the lowest possible cost. In the Golden State system, government
regulators set an annual limit (cap) on the GHG emissions produced by the
state’s factories, power plants and oil refineries. The cap will decline about
a percentage point for the first two years and three percent each year after
that.
The basic premise of cap-and-trade is that government doesn't tell
polluters how to clean up their act. Instead, it simply imposes a cap on
emissions. Each company starts the year with a certain number of tons allowed—a
so-called right to pollute. The company decides how to use its allowance; it
might restrict output, or switch to a cleaner fuel, or buy a scrubber to cut
emissions. If it doesn't use up its allowance, it might then sell what it no
longer needs. Then again, it might have to buy extra allowances on the open
market. Each year, the cap ratchets down, and the shrinking pool of allowances
gets costlier. As in a game of musical chairs, polluters must scramble to match
allowances to emissions.
Companies will buy and sell allowances to emit carbon dioxide and other
heat-trapping gases (GHG). Now, each allowance represents one ton of Carbon
Dioxide (CO2). The minimum price starts at $10 per allowance (ton of
Co2) and will slowly increase over time. The number of allowances
that a company must hold is determined based on the standard emission from
their type of business or facility. Companies that cut their emissions quickly
will have spare allowances they can sell to other businesses that are having a
hard time making reductions. This is easy to see if we look at emissions
through an industry specific looking glass, as it would be difficult to conceive
of a cap and trade program working without allowances being industry specific.
In the beginning were the electric utilities. The utility companies
will be getting all the allowances they need for free (for a while anyhow). The
utilities will be required to sell allowances at state-organized auctions that
occur four times each year. The money the utilities make must be used to
benefit their ratepayers, possibly through a credit on customers’ bills or maintenance
on equipment and transmission lines that would offset rate hikes much like the
one the CPUC just approved. Most manufacturers will receive 90 percent of their
allowances for free in the first two years, dropping to 75 percent in 2015.
The first auction happened last November and had 23,126,110 tons of
2013 vintage Co2 allowances up for sale on an electronic trading
platform. Companies and traders who registered in advance submitted sealed bids
specifying how many allowances they wanted to buy, and at what price. The bids
were ranked from highest price to lowest until all the allowances have been
allocated. The lowest price at which allowances were allocated became the price
that all participants paid, regardless of their original bids. In November’s
auction, the allowances sold for $10.09 with the reserve price set at $10 and
the maximum price submitted was at $91.13 mean price was $15.60 and the Median
price was $12.95. Where is Effie Trinket when you
need her? Now, as far as the secondary market, companies and traders can
continue trading outside the auctions, but each allowance has a serial number,
and all transactions must be recorded in a central tracking system.
There was also an advance auction of 2015 vintage allowances that sold
5,576,000 of 39,450,000 available allowances for sale at the price of $10.00
with a maximum bid of $17.25 and the mean of $11.07 and Median price being
$10.59, the maximum price submitted was $17.25 and the minimum was $10.00 and
therefore all 2015 vintage allowances were sold at $10.00. The drawback of
buying vintage 2015 allowances is that your funding source is tied up two years
in advance; the benefit is that you pay a much cheaper price for allowances purchased
today that will be used in 2015, when the number of allowances will be dropping
to 75 percent. In layman’s terms, if you know your company will need allowances
in 2015 and it has the capital to purchase allowances today, the price will be
rock bottom today ( hence the $10 price tag) vs. purchasing them in 2015 when
every industry will need them and the price is much higher. How about this for
a business venture, buy up all the 2015 allowances you can and sell them when
2015 comes around for three to four times the price they were originally purchased
for. Sounds like a great way to make it
rich to me.
See the air resource board for a complete list of
qualified bidders and a more detailed account of the November 2012 auction. Below is a sampling of what you can expect to find:
Offsets
Companies can also buy offsets, credits generated by forestry
projects and other endeavors that either remove greenhouse gases from the
atmosphere or reduce emissions. But the offsets must be generated in the United
States and can account for no more than 8 percent of all the allowances that a
company needs. To me, offsets should be limited to the state of California
(for this specific situation) as other states and federal entities are not
participating and thus, should not be allowed to participate in an offset
program?
Market manipulation?
The Air Resources Board has set limits on the percentage of
available allowances that any individual company or trader can hold, to prevent
anyone from cornering the market. Consultants will also monitor the auctions,
looking for unusual trading behavior. We can all see this one happening or
at least someone trying to make this happen.
Where does the
money go?
Amazingly enough, this hasn't been decided; by law, money the
state raises by selling allowances must be used to help reduce greenhouse gas
emissions and cannot simply be dumped into California's general fund as if it
were tax revenue. But the Legislature has not yet hammered out
the details.
Important information
Hirschman-Herfindahl index (HHI): The HHI is a measure of the concentration of
allowances purchased by winning bidders relative to the total sale of current vintage
allowances in the auction. The percentage
of allowances purchased by each winning bidder is squared and then summed
across all winning bidders. The HHI can
range up to 10,000, representing 100% of the current vintage allowances purchased
by a single bidder (i.e., 100x100=10,000).
Read more:
Photo Credit: Jacobsen, Nina and Kilik, Jon (Producers) & Ross, Gary (Director). 2012. The Hunger Games [Motion picture]/ United Sates. Lionsgate, Color Force.
Photo Credit: http://www.flickr.com/photos/cecmtl/5594631871/