December 4, 2012 - From the December, 2012 issue

California Drops The Hammer On Inaugural Carbon Allowance Auction

On November 14, the California Air Resources Board officially established a price per ton of carbon with the State’s first-ever auction of greenhouse gas emission permits, known as the cap-and-trade program. TPR presents the following edited transcript of a November 19 press call in which Chairwoman Mary Nichols outlines the aims and results of the auction, taking questions from the Sacramento Bee, the San Jose Mercury News, the San Francisco Chronicle, the Associate Press, and others. Nichols expresses confidence in the market’s future and reflief that the permits were sold without issue.


Mary Nichols

“The goal here was to have a competitive bidding process and to get the allowances sold to the people who need them.” -Mary Nichols

Mary Nichols: Good afternoon everybody, and welcome to this call. I’m here to report, with great pleasure, that the first auction of carbon allowances by the State of California was a success. This is an important milestone for our state, a leader in the global clean technology market.        

By putting a price on carbon, we know that we are beginning the process of breaking our dependence on fossil fuels, moving at full-speed toward a cleaner energy future, and that will mean new jobs, cleaner water and air, and a model that will be available for other states, as well as the nation, to use as we begin the battle against climate change and make our economy competitive and resilient.

I want to give you some specifics. You probably have all seen them posted, but just to be clear, this auction was above 2013 and 2015 vintage allowances. These are compliance instruments used in our cap-and-trade program. We are very pleased with the results first of all, of course, because the auction worked successfully. That is, people were able to bid, that the monitor certified that the auction worked properly and the platform operated as it was designed to do. People were able to upload the bids that they wanted, and that the auction worked according with the regulations. So the market monitor was able to confirm that the auction was settled correctly, and that there was no evidence of any collusion or manipulation in the bidding process.    

This is the result of two years of very detailed, meticulous work by the state, working with consultants to develop the software and the auction platform that was designed to fit the specific needs of California. It also represents a long period of work with our stakeholders, many of whom were involved in the auction last week. We set up and held a practice auction and learned a lot from that. We were successful in giving away free allowances through a tracking system that was created in advance of the auction, and this, in turn, is going to serve as a way to hold allowances for those who bid successfully. Hundreds of participants were trained at every stage of the process, including how to register and bid, and it all worked just as we had hoped it would. So we’re please by the support and look forward to answering your questions.

Dale Kasler (Sacramento Bee): Mary, are you now concerned that the prices came in as low as they did, just above the minimum? Does that in anyway undermine the goals of AB 32?

Mary Nichols: No, not at all, actually. We’re very pleased. We think, first of all, that there’s evidence that the market was very competitive. For those of you who are unfamiliar with this type of auction, we weren’t trying to sell to the highest bidder. The way this auction works is that bidders bid in secret for whatever they wanted, and they were allowed to bid up to a particular holding limit and to the amount that they had placed on reserve for themselves as a guarantee for their bids. The auction then filled those bids going from the highest bidder down to whatever the lowest number was, filling bids as they went. In other words, the goal is actually to sell people as many allowances as they are bidding for, down to the level of the reserve price. The goal here was to have a competitive bidding process and to get the allowances sold to the people who need them. We were extremely successful in doing that.

Diana Hull (San Jose Mercury News): Good afternoon and congratulations. In all of the viewpoints that have been released today, what is the most critical? Is it that fact that the auction effectively sold out? That you had a maximum bid at a tie of $91? I’m just looking at all the data and trying to zone in on what you think is the most telling in terms of the success of this first auction.

Mary Nichols: Well, there are a couple of things. First of all, we were looking for signs that the market was not competitive, that people were not bidding. The fact that 97 percent of the allowances were purchased by compliant entities is a very good sign because it means that people are getting the idea that they can purchase these allowances and that it’s a good buy for them. They will need them in the future. It could be that for them it will either be cheaper than it might be if they actually had to clean up their emissions, or that they will have allowances to sell, which is exactly the way the system is supposed to work.    

I think we have evidence here that we were able to run a successful auction, and that people were able to get the allowances that they wanted, and that the whole thing went off with out a glitch.  

David Baker (San Francisco Chronicle): Good afternoon. You actually may have just answered my question. I was going to ask, how big a role in the auction has pure trading displayed, as opposed to companies that will actually need the allowances? You’re saying that only 3 percent went to financial institutions outside of the companies that are actually covered in the system?

Mary Nichols: Yes, that’s correct.

David Baker: Are you surprised by that? Were you expecting higher participation for them? Or is that more or less what you thought?

Mary Nichols: You know, we really weren’t expecting anything. People keep asking that question: “Is this higher, lower, better, bigger?” The answer is that we were looking to see if we could run an auction and if the prices would come in at levels that weren’t too high. If anything has been worrisome up until now, it has been the question of whether the cost of it would go up at site or whether there would be enough allowances for people who needed them. And I think we were able to show that it worked just fine.

Rob Artigo (KGO Radio, San Francisco): Is there a particular number here that stands out to you as good or bad, a peak number or something that was really low that caught your attention? And also, is there a fee associated with the transaction itself, so that where there is money made or lost based on just the transaction, like trading a stock?

Mary Nichols: Participation in the market is free. We don’t charge anything to people to bid or offer allowances at the auction; it’s being run by the state without any cost to the participant. I’m expecting that some people might look at the fact that not all of the 2015 allowances were sold and might question whether that was a cause for concern. The answer to that is, it was not unexpected.    

We were offering a very large number of allowances at one auction because under our regulations, at each auction you can offer some allowances for a compliance period three years ahead. There was a pent-up bunch of allowances that were being offered all at one time. 2015 allowances will then be available only in 2015, when they are needed for compliance. So we don’t see anything there that causes any particular surprise.    

We’re just pleased that the allowances sold out, and at a good price. We think that’s a sign that we have a vibrant and successful market here.

Jason Dearen (Associated Press): I have two quick questions. The first is: did the staff learn anything in this auction that was different from the practice auction?   

Mary Nichols: I had been talking to the staff this morning about the results of the auction; I think everybody here is just delighted that it went off exactly as we had intended. There were no surprises other than the fact that there were no surprises.

Jason Dearen: And one quick follow up to that: what kind of indicators are you going to be looking for? This is one auction, and there are lots of moving parts and things changing as this program moves forward, so in the next two or three auctions next year, what will you guys be looking for in terms of indicators of the strength and integrity of the program?

Mary Nichols: We used a contractor as an independent monitor for the market to review the bidding, and so they have given us their report. It’s quite extensive. That’s why there was a delay between the holding of the auction and the certification—it was for them to review every detail about the bidding.    

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We’re not able, under our regulations, to comment on who bid what and who got what through the auction because that information is confidential. Each entity has to develop its own bidding strategy based on its own need for allowances or their potential for making money through the sale of excess allowances.    

At this point, really, all we can say is that we’ve reviewed their report, and it was an absolutely clean bill. Information in it, I think, is reflected by what we were able to put out today, which is that there was a very competitive market with a lot of participation, and we would hope to see that continue in future auctions.

John Myers (KXTV): This is the first time we’ve seen the list of qualified bidders. I’m wondering, how would you characterize the bidders involved in this process? Obviously a lot of industries would be affected by the changes, but what would be a fair characterization to you of who’s lining up to bid?

Mary Nichols: I think it represents a really excellent cross-section of the entities that are subject to the cap-and-trade program. Obviously the electric utilities were required to participate in the auction under the terms of the regulations, but the fact that the regents of the University of California, or the Riverside Cement Company, just to pick out a couple, were all signing up to participate in the auction, to me, indicates that people have gotten the idea of what this auction is about, what the advantages of participating were. They took all the necessary steps and were successful in getting themselves into a position to be bidders, so we’re just really delighted by that participation.

John Myers: Just to get you to comment on something that was raised several months ago: there were discussions and concerns by some that the auction was not done in a more open process. It was a closed auction, a fairly private auction, not subject to open meeting laws—your comment on the necessity of that?

Mary Nichols: The auction itself was designed to be done on a confidential basis because these are private decisions that businesses are making as to whether they are going to reduce emissions or purchase allowances, and we will not know, until it comes time for them to demonstrate compliance with the cap, what the methods are that they’ve chosen. This is the whole point of having a free market system—companies get to choose whether they are going to buy their allowances from others or whether they are going to reduce themselves.    

There’s not any confidentiality issue as far as the way the California system was designed. The participation in the regulation that created this auction was extremely extensive. We had dozens of workshops and hearings in front of the Air Resources Board, where companies that were interested, including not only the companies that are subject to the regulation but business that are interested in participating in the market, were heard and were on the record in open meetings. So I’m not sure whether you’re referring to perhaps some other process, but there’s nothing that was done about the creation of this program that was not done through open meetings.

John Myers: I was referring to the auction itself.

Mary Nichols: The auction itself is a sealed-bid auction. I suppose you could think of having an auction where people stand around and wave their paddles for every lot that’s offered up, the kind of auction that people do when they’re selling a painting, for example. But the goal of that auction is to raise money; the goal of this auction is not to raise money; the goal of this auction is to achieve a cap at the lowest possible cost for all of the market participants, so it’s a different kind of auction.

Debra Kahn (Greenwire): I was just wondering, on the list of statistics here, it reads that the total submitted bids divided by the total 2013 allowances available for sale is 3.1. Can you just explain what that means?

Mary Nichols: Sure, I’m going to turn it over to Steve Cliff.

Steve Cliff: Hi Debra, that means that there was an ask of about three times the amount of available allowances. So bidders put in for approximately three times what’s available.

Debra Kahn: Oh, that’s pretty good, right?

Mary Nichols: Yes. It’s a good sign that there was a lot of interest in the auction.

Question: Getting into the lawsuit filed by the Chamber of Commerce, which seems to do away with these auctions, what do you make of that lawsuit and its chances? Do you see it as something that will ultimately change the way the state functions in regards to the auctioning?

Mary Nichols: We designed this program to withstand legal challenges, and we believe that it will. We did expect, nevertheless, that some party or another would sue, so we’re not shocked that the Chamber chose to file. I don’t think I have anything more to say about it than that. We don’t think it had any impact that we can detect on the actual conduct of the auction.  

Rich Ehisen (State Net Capitol Journal): What impact, if any, did this have in California’s relationship with Quebec? In particular, how does it relate to the administration’s role in furthering that relationship?

Mary Nichols: We have been continuing to work with our partners in Quebec to link our programs together. We have not made all the necessary findings to do that in front of the ARB; we need to have another proceeding at the board level in order for the linkage to occur.    

Frankly, I think we’ve been preoccupied with the preparations and holding of this auction, and so we’ve waited until now to really push forward to make the linkage happen. We are expecting that we will get there by sometime next year.

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