-- John Kemp is a Reuters columnist. The views expressed are his own --
California is set to auction all or almost all allowances under its emissions trading programme, and rebate up to 75 percent of the proceeds to households through a lump sum payment or reductions in income and sales taxes.
The proposals, contained in a draft recommendation from the Economic and Allocation Advisory Committee (EAAC) to the California Air Resources Board (CARB), are in sharp contrast to the proposed federal programme, stalled in Congress, which would give away most permits to utilities and other energy intensive industries.
Since California's proposed programme is one of the most advanced, and would be the largest and most comprehensive in the country, with links to other states through the Western Climate Initiative (WCI), the decision gives significant impetus to proponents of the cap and refund approach, now emerging as a credible alternative in Congress.
ADVISORY COMMITTEE MANDATE
California's Global Warming Solutions Act 2006 (AB 32) requires the state to reduce its greenhouse gas emissions back to 1990 levels by 2020. CARB has developed a "Scoping Plan" detailing how the state will achieve this using a mix of direct regulations and an over-arching cap and trade programme.
In May 2009, CARB established an Advisory Committee, consisting of technical experts, to make recommendations on two key elements: (a) how to put allowances into circulation (via auctions, free distributions, or some combination of the two); and (b) how to allocate free allowances or the revenues from permit auctions.
In making recommendations, the Advisory Committee must take account of various statutory objectives, among them to "ensure no disproportionate impact on low-income communities" and design the regulations "in a manner that is equitable, seeks to minimise costs and maximise the total benefits to California". The draft recommendations therefore carry weight as an expert opinion of which system best meets both equity and efficiency criteria.
ALLOCATING PERMITS BY AUCTION
The Committee reviewed a range of auction designs (single or multiple rounds, uniform or discriminating price) as well as mechanisms for free distributions (fixed allocations based on historical emissions, or allocations updated in line with changes in relative output).
In the end it recommended all or almost all permits be sold through uniform price, single round (sealed bid) auctions. Permits would be given free only to energy-intensive and trade-exposed industries at risk of a real competitive disadvantage, and only where the problem of "emissions leakage" cannot be addressed by other means such as a border adjustment.
The Committee admitted free allocations have some advantages. They compensate emitters for compliance costs in the most direct and expedient manner.