Low auction result helps legal case for cap-and-trade

Joshua Stark Headshot

When the California Air Resources Board released the results of its May auction of carbon allowances, audible gasps from around the state could be heard from the space station.

I kid – but only just a little. The auction results did in fact create a great shock: many had expected at least half a billion dollars to be collected at the quarterly auction, but the auction generated only about ten million dollars.

Reactions from around the state were swift. Some who’ve often mistakenly called this market mechanism a “carbon tax,” claimed it strengthened the legal challenge by Big Oil and other polluters (by way of the California Chamber of Commerce). And even some people who are supportive of cap-and-trade became very somber about the prospect of a broken system.

But here’s the truth: The super-low May auction result should actually help the state’s legal defense of cap-and-trade.

In their legal challenge, Big Pollution argues that the program is actually a tax, and therefore must get a two-thirds vote from the Legislature. They say that businesses are forced to participate in this program by giving money up to the State, and this forced relinquishing of dollars is equal to a tax.

However, they’ve got it wrong. California’s cap-and-trade program relies on a “market mechanism” that allows businesses to determine the cheapest way to meet industry-level caps on carbon pollution.  Businesses can either choose to participate in the state’s auction, or they can buy up the allowances they need on a secondary carbon trading market.  The total amount of pollution allowed by the state remains the same.

Additionally, individual companies can figure out if it is cheaper to clean up their pollution. Many individual companies have been able to reduce their emissions, thus relying solely on the free permits they were given. That of course is a major goal of cap-and-trade, to promote efficiency of individual actors.

Furthermore, as long as there are allowances trading in the secondary market, a business does not have to participate in the state’s auction – and if they do buy allowances, and then clean up their pollution before using them, they can sell their allowances to other businesses. Any business’ participation in a quarterly auction is not mandatory.

Why hold an auction at all, then?  Well, a state auction is a necessary component for at least two reasons:

  • It helps capture some of the costs of pollution to the public and the state, providing resources to invest in a healthier, cleaner future;
  • It can be helpful in mitigating market fluctuations over months and years.

The first reason is extremely important to TransForm.  The state needs to continue investing in communities in ways that reduce our greenhouse gas emissions and provide myriad other benefits. It is especially important that funds generated by a carbon allowance auction be used to help the millions of Californians who need real choices in where they can live and how they get around. TransForm’s own Windfall for All report has shown that the communities with greatest access to public transportation save $5,400 in some regions, by reducing auto ownership and use.

Investments in affordable, transit-friendly communities, urban forestry and retrofitting buildings for energy efficiency are an excellent use of these auction proceeds because they are areas that are hard to achieve pollution reductions through more typical regulatory methods. And they ultimately help Californians lead more comfortable, healthier lives.

The second reason is important for the long-term sustainability of the program.  Markets fluctuate (and new markets tend to fluctuate more wildly than older ones) but even our most established markets have swings and dips. Remember 2008? The whole world took a dive. Just 18 months ago the oil market plummeted, and it still hasn’t come back to near its previous price.

If we are going to rely on a market mechanism to help establish a cap on our carbon pollution, we must learn to live with quarterly uncertainty, and we must build in safeguards to ensure that we get real greenhouse gas reductions over time.

One safeguard that’s already in place: the unsold allowances are taken out of the auction by the Air Resources Board until the price of carbon allowances lands above the price floor for two consecutive quarters.

Over time, safeguards like these can help mitigate most impacts of quarterly swings in the auction, and provide a sense of long-term certainty in the system. At the same time, funds that are collected from the auctions need to be invested in projects and programs that benefit Californians throughout the state.

Unfortunately, this quarter’s market fluctuation seems to have shaken up California’s leadership. They continue to put off investing the auction revenues from past auctions, and now say that they hope to have an agreement on investments in August.

California needs to invest these dollars in projects that provide many benefits to our communities in addition to reducing greenhouse gases. From affordable housing near transit, to bus and rail service, to solar and energy efficiency for low income families, these investments are often helping out Californians who need the most help – Californians who have borne the brunt of climate change, air pollution, and terrible infrastructure investments from years past. You can see the tremendous benefits from investments we’ve already made over the past year at ClimateBenefitsCA.org.

We urge California’s leaders to look beyond the short-term challenges, and take the long view that is so desperately needed to address our state’s inequities, and protect our planet for generations to come. The Legislature should pass SB 32 to strengthen and extend our climate program, and allocate our current auction revenues. Their swift action would send the message that our state is committed to continued leadership toward a more sustainable and just future.

This blog was also published as an opinion piece in the Capitol Weekly.


About This Blog

TransForum is the blog of TransForm, California's leading transportation advocate. For more about our work, including ways you can take action and contribute, visit TransFormCA.org.