Auctioning Off Greenhouse Gases: California Initiates "Cap and Trade" Program

California's groundbreaking cap and trade program began this week with its first carbon allowance auction. The new system, designed to curb the state's carbon emissions, regulates how much carbon companies can emit and requires them to pay the state extra, through the purchase of allowances, if they produce over their limits.

The cap and trade program is central to the state's 2006 global warming law, AB32. The new system sets up regular greenhouse gas auctions over the next eight years. According to MSNBC for the first two years large industrial emitters will receive 90 percent of their allowances for free, giving them time to decrease their emission levels through new technologies or other means. The remaining 10 percent are to be auctioned off to the highest bidders.

The California Chamber of Commerce made an eleventh hour protest on Tuesday evening against the program but today's auction is scheduled to go ahead. The Chamber argued that the program is illegal as it represents a regulatory fee that goes against existing state law. The Chamber does hope, however, that future auctions will be derailed. Allan Zaremberg, the Chamber's president, said in a statement, "Unless we adopt the most cost-effective way of reducing carbon emissions, other states will not follow us. The current … proposal is the most costly way to implement AB32, and it will hurt consumers, the job climate, and the ability of businesses to expand here." 

Stanley Young, a spokesperson for the California Air Resources Board (CARB), which runs the auctions, estimates that Pacific Coast producers will only spend about $60,000 on allowances in the first two years of the new system. Pacific Coast attorney Mona Shulman, however, disputes this figure suggesting it could cost double that amount. The European Union program that California's cap and trade system is modeled on has struggled with a chronic oversupply of carbon allowances and sagging prices since its initial post-inception boom in 2005.

Despite the Chamber of Commerce's legal attack on the constitutionality of new program, which they insist constitutes an additional tax on companies, CARB spokesman Young is "confident that the cap and trade program will withstand any court challenge."