The auction was a success and an important milestone for California as a leader in the global clean tech market. By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future. That means new jobs, cleaner water and air—and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient.

—ARB Chairman Mary D. Nichols

California entities covered by the cap-and-trade requirement (oil refineries, manufacturers such as cement makers, food processors, and electric utilities), opt-in covered entities, and voluntarily associated entities were eligible to participate in the November 2012 GHG allowance auction.

Entities will first need to surrender allowances to the state government to cover 2013 emissions in November 2014 (30% of a company’s 2013 emissions). The next surrender of allowances will be Nov 2015 (which will be 70% of 2013 emissions plus 100% of 2014 emissions.)

In 2015, entities covered will expand to include distributors of transportation, natural gas and other fuels, and by then cover about 85% of the state’s economy.

The 2013 emission cap is about 2% below forecasted levels for 2012, and declines about another 2% in 2014, before accelerating to an annual approximately 3% decline from 2015 to 2020.

Use of revenues. How to spend the auction proceeds still remains somewhat unspecified; AB 32—the legislation that is the basis of the cap-and-trade program—does not address how auction proceeds should be used. On 16 November, the California Public Utilities Commission (CPUC) issued a Proposed Decision that would direct how revenues generated from the sale of greenhouse gas emission allowances allocated to the investor-owned electric utilities should be used. If approved by the CPUC, the Proposed Decision would return approximately 85% of the allowance value directly to households as a rate reduction and a semi-annual “climate dividend.” The total amount of revenue to be returned to ratepayers between 2013 and 2020 is expected to range from $5.7 billion to $22.6 billion.

The Proposed Decision establishes several primary policy objectives to guide the use of the allowance revenues. These primary objectives are to:

• Preserve the carbon pollution price signal in electricity rates;

• Ensure that economic activity does not shift to other states and countries as a result of the Cap-and-Trade program;

• Reduce adverse outcomes on low income households; and,

• Maintain competitive neutrality among the utilities and Community Choice energy programs and Direct Access providers.

The Proposed Decision finds that, in general, electricity rates should reflect the cost of carbon, as determined by the price of emission allowances sold in the Cap-and-Trade program. Preserving the carbon price signal is critical to providing appropriate incentives for businesses and individuals to reduce greenhouse gas emissions when making decisions regarding their energy use. However, in some circumstances, other important factors need to be considered.

• The Proposed Decision directs the investor-owned utilities to return allowance revenues to businesses operating in industries identified by ARB as emissions-intensive and trade-exposed. These businesses emit large amounts of greenhouse gas emissions and operate in competitive markets. This allocation of revenue is expected to cover the majority of the Cap-and-Trade-related costs these industries will experience in electricity rates while preserving incentives for these entities to reduce their emissions. The Proposed Decision also commits to consider in a follow-up process expanding the list of eligible industries to include trade-exposed entities that, while not emissions-intensive, face substantial indirect Cap-and-Trade costs through electricity purchases.

• The Proposed Decision directs the investor-owned utilities to use allowance revenue to offset the Cap-and-Trade costs in small business electricity rates. Over the 2013-2020 period, the electricity rates small businesses are subject to will gradually rise to reflect the cost of carbon. This is intended to enable small businesses to adjust to the Cap-andTrade program through investments in energy efficiency, operational improvements, and clean energy technologies. The Proposed Decision defines qualifying small businesses as any nonresidential customer—including agriculture, nonprofits, and others—that consumes less than 20 kilowatts of power. A proposal attached to the Proposed Decision sets forth a preliminary formula for revenue distribution to small businesses that will be further refined via a subsequent decision following a public workshop process.

• All of the remaining allowance revenue would be returned to residential customers, through two mechanisms. First, the Proposed Decision directs the use of the allowance revenue to fully mitigate the carbon costs that would otherwise be reflected in residential rates. While not in keeping with the general preference to preserve the carbon pollution price signal, in the case of the three large investor-owned utilities (Pacific Gas and Electric Company, Southern California Edison, and San Diego Gas & Electric), the Proposed Decision finds that an exception is warranted given the tiered structure of residential rates, which due to statutory constraints prevents carbon costs associated with residential consumption from being passed through to lower-tiers. Including the carbon cost only in upper-tier rates would further exacerbate the large gap that has developed between lower and upper-tier rates. The Proposed Decision finds that including additional carbon costs resulting from the Cap-and-Trade program in upper-tier rates would be unfair to customers with consumption in the upper tiers.

  After using revenues for compensating emissions-intensive, trade exposed-industries and offsetting the carbon costs in small business and residential rates, the remaining revenues would be given to residential customers as an equal semi-annual bill credit for each residential account. This “climate dividend” is intended to help offset any increases in the costs of goods and services that may result from the Cap-and-Trade program. In essence, under the compensation framework envisioned by the Proposed Decision, households will be paid by polluters for the right to emit greenhouse gases. This framework holds entities to account for their contributions to climate change, while limiting the impact of the Cap-and-Trade program on household budgets.

The vote on the Proposed Decision is currently scheduled for 20 December 2012.

Resources

• Cara Horowitz, M. Rhead Enion, Sean B. Hecht, and Ann Carlson (March 2012) Spending California’s Cap-and-Trade Auction Revenue: Understanding the Sinclair Paint Risk Spectrum