Demand rebounds for California pollution credits in state auction

SACRAMENTO — Demand for California pollution permits rebounded in the latest carbon auction after plummeting earlier this year, state officials said Tuesday.

Still, the permits did not sell out, heightening uncertainty about the program’s future.

About 88 percent of the available credits were purchased at the quarterly auction held last week by California and its trading partner, Quebec, Canada. That’s an improvement from the 35 percent sold in August and 10 percent in May.

However, the uncertainty blamed for depressing the demand may be getting worse as President-elect Donald Trump, who called man-made climate change a hoax during the campaign, prepares to take office. Trump further muddied his position Tuesday, telling the New York Times he thinks there’s “some connectivity” between humans and climate change.

Since 2012, California has required companies emitting climate-changing gases to buy pollution permits, which are auctioned quarterly and also sold in secondary markets. Until demand plunged this year, the credits routinely sold out, generating hundreds of millions of dollars for state environmental initiatives.

The uptick this quarter was likely spurred by an increase in the price floor for credits next year, experts on the market said.

Alex Jackson, legal director for the National Resources Defense Council’s California Climate Project, cautioned against drawing conclusions from the results of one auction.

“There’s a tendency to read into these quarterly auction results as a barometer of the overall health of the program,” Jackson said. “The objective of the program is to reduce emissions, not raise revenue.”

The pollution program, known as “cap and trade,” is among the most visible weapons in California’s arsenal of policies that seek to control emissions of heat-trapping gases and are credited with keeping emissions in check despite a growing population.

Proceeds from the cap and trade program fund a variety of initiatives prized by the Democrats who control California’s government, including transit construction and energy conservation efforts. They’re a primary source of revenue for a high-speed rail project that’s one of Gov. Jerry Brown’s top priorities.

This year’s dip in demand is blamed on a glut of permits on the market and mounting legal uncertainty about whether the program will survive a number of legal challenges on the horizon.

A state appellate court will hear arguments in January in a lawsuit filed by the California Chamber of Commerce contending that the program is an unconstitutional tax because it wasn’t approved by a two-thirds supermajority of the Assembly and state Senate.

Lawmakers injected a shot of certainty in September when they extended California’s climate change goals for another 10 years and set a much more ambitious target. Still, critics argue the legislation, SB32, does not extend the authorization for the cap-andtrade program beyond 2020.

The passage of SB32 may have had a small impact on demand, but it’s influenced far more by the expectation of rising prices next year and the uncertainty derived from the California Chamber of Commerce lawsuit, said Alex Rau, a director at the carbon-market advisory firm Climate Wedge.

It’s difficult to determine the impact that Trump’s election has on the market, Rau said. There may be an increased risk of federal interference in the California program, which would tend to put downward pressure on demand, but increased inflation expectations would have the opposite effect, he said.

“We have to be frank that there probably is some uncertainty from that, but I don’t think it’s reflected in this market as much,” Rau said.