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California Carbon Rules May Spur $559 Billion Market (Update1)
2010-12-15 19:24:44.799 GMT
(Updates with New Mexico lawsuit starting in 21st
By Simon Lomax and Mark Chediak
Dec. 15 (Bloomberg) -- California, the most populous U.S.
state and the world's eighth-largest economy, is set to approve
a carbon-trading program that may spawn a $559 billion market in
greenhouse-gas pollution rights.
The California Air Resources Board meets tomorrow in
Sacramento to vote on cap-and-trade regulations requiring the
state's power plants, refineries, factories, cars and trucks to
cut pollution by about 15 percent by 2020. The state would
enforce the cuts by issuing a declining number of carbon dioxide
permits, or allowances, that can be bought and sold.
The nine-year program, scheduled to start in 2012, will
issue carbon permits worth $83 billion, according to Bloomberg
New Energy Finance estimates. Secondary trading of those
allowances among companies, such as banks and hedge funds, may
add $476 billion to the value of the California carbon market
during the same period, said Milo Sjardin, head of North
American analysis for New Energy Finance.
"California is the next best hope for a meaningful carbon
trading system in the U.S., and investors are treating it that
way," Thaddeus Huetteman, a director and former chairman of the
Environmental Markets Association, a body representing traders
and brokers in pollution rights, said in a telephone interview.
President Barack Obama this year failed to win approval in
Congress for a larger federal cap-and-trade program to curb the
greenhouse gases scientists have linked to climate change.
Legislation that narrowly passed the House, then stalled in the
Senate, might have fueled a $5.1 trillion market for carbon-
dioxide pollution rights from 2012 to 2020, Sjardin said.
Some California businesses and industry groups say the
market as currently designed will be a drag on the state's
economy and should be changed.
Trading in California carbon allowances has started even
before the rules of the state's cap-and-trade program are final.
London-based Barclays Plc and Spectron Group Ltd. separately
announced deals last month for the delivery of California
carbon-dioxide allowances in December 2012.
Exchanges also are showing interest. The Green Exchange
LLC, a New York-based emissions trading platform whose founders
include CME Group Inc. and Goldman Sachs Group Inc., plans to
offer California carbon contracts in the first quarter of 2011,
Henrik Hasselknippe, managing director of global product
development, said in a telephone interview from London.
Eyes On California
"In the absence of a federal system, everyone's eyes have
now turned to California," he said. New York-based Nasdaq OMX
Inc. also may "pursue the carbon potential in California,"
Geir Reigstad, a senior vice president at the exchange company,
said in an e-mail.
There should be "significant trading" next year as firms
in California prepare for the scheduled 2012 start of the cap-
and-trade program, Kedin Kilgore, Barclay's head of U.S.
emissions trading in New York, said in a telephone interview.
The proposed carbon market is one of the programs
authorized under California's Global Warming Solutions Act,
which was signed into law in 2006 by Republican Governor Arnold
Schwarzenegger. The law, known by its bill number, AB 32,
requires the state to cut greenhouse gases to their 1990 level
The law survived a challenge in the Nov. 2 election, when
California voters rejected, 62 percent to 38 percent, a proposal
to suspend the law until the state's unemployment rate falls to
at least 5.5 percent. The rate in October was 12.4 percent, the
state Employment Development Department said last month.
Double Northeast's Market
The cap-and-trade regulation to be considered tomorrow by
the 11-member air resources board would cover pollution sources
responsible for almost 400 million metric tons a year of carbon
dioxide by 2015.
That's more than double the emissions covered by the
Regional Greenhouse Gas Initiative, a state-run carbon market
for power plants in the U.S. Northeast, and almost one-fifth the
current scope of Europe's cap-and-trade program, according to
data compiled by Bloomberg.
PG&E Corp. and Edison International are among utility
companies that would get free permits to shield their customers
from higher electric bills under California's proposed system.
While refiners including Royal Dutch Shell Plc and
ConocoPhillips would also get some permits without paying, they
would have to buy most of the allowances they need within a few
years. That may mean higher gasoline prices for motorists when
refiners start adding the cost of those carbon-dioxide
allowances to the fuels they sell, according to an October
report from the air resources board.
'Ready to Go'
Tomorrow's vote should declare California's cap-and-trade
program "ready to go," Mary Nichols, chairman of the air
resources board, said in a Dec. 1 telephone interview. Some
specifics, such as how many free allowances are given to
individual companies, won't be decided until next year, she
The board also will review next year California's progress
in building a regional emissions-trading system with other
Western states and Canadian provinces, she said. Nichols, who
has said California doesn't want to be alone in setting up a
cap-and-trade program, declined to say how many other states and
provinces need to join the proposed regional carbon market for
California to move ahead in 2012.
"It's better to proceed as if we were going to have
partners and then take a look and see where we are," she said.
'Linking' With California
The air resources board's staff said in an October report
that New Mexico and the Canadian provinces of British Columbia,
Ontario and Quebec, which also have cap-and-trade laws, are
early candidates for "linking" with California's market.
PNM Resources Inc., owner of New Mexico's largest electric
utility, is trying to strike down that state's cap-and-trade
regulation, which was approved by an environmental board on Nov.
2. The company filed a lawsuit yesterday in the New Mexico Court
of Appeals challenging the rule, Don Brown, a PNM spokesman,
said in a telephone interview.
New Mexico Governor-elect Susana Martinez, a Republican who
will assume office next month, also opposes the program, which
was designed to let the state join the regional carbon market
led by California.
The current design of California's emissions market poses
"huge risks" to the economy because of "limited
participation" by nearby states in carbon trading and the "dim
prospect of a federal cap-and-trade program anytime on the
horizon," the AB 32 Implementation Group, a coalition of state
and local business organizations, said last week in a filing
with the board.
The board should scrap plans to sell some of the cap-and-
trade program's carbon allowances at auction and give them to
companies for free so jobs and investment don't flee the state,
the group said.
For Related News and Information:
Top environment stories: GREEN <GO>
Stories about U.S. and climate: TNI US CLIMATE <GO>
Global emissions data: EMIS <GO>
--Editors: Larry Liebert, Steve Geimann
To contact the reporters on this story:
Simon Lomax in Washington at +1-202-654-4305 or
Mark Chediak in San Francisco at +1-415-617-7233 or
To contact the editor responsible for this story:
Larry Liebert at +1-202-624-1936 or LLiebert@bloomberg.net.