California Cap and Trade Program Expected to Bring in Revenue

Since the release of Governor Brown’s budget two weeks ago, there have been a lot of questions about how much revenue could be coming from auctioning emission allowances under California's cap and trade program.  Although we won’t know the exact amount until the auctions actually take place (the first two are scheduled in August and November of 2012), I will attempt to shed some light on revenue projections based on what we currently know.

Allowance Buckets Under AB 32 Cap and Trade

The first important thing to know is that allowances from the cap and trade program fall into several different buckets. Although these buckets can be broken down into even greater granularity, allowances will be distributed under the program in four broad categories:

1. Some will be sold in what I call the "state auction." It is the revenues from this auction that are in the Governor's budget. The size of this auction will grow significantly in 2015 when emissions from the transportation sector become regulated under the cap.
2. Some allowances will be allocated to the investor-owned utilities (IOUs) who are required to then sell them into a "consignment auction" and use the proceeds for the exclusive benefit of their retail customers.
3. Some will be allocated to publicly owned utilities (POUs), who may either sell them into a consignment auction like the IOUs, or submit them directly for compliance to help them make the transition to clean energy.
4. Finally, some of the allowances from the cap and trade program will be allocated directly to refineries and other manufacturers to help them transition into the program.

The total value of each of the above buckets equals the number of available allowances under each category times the market clearing price.  The numbers of allowances in each bucket is set by regulation. The price of an allowance will be determined at auction. The first auction will occur in August 2012, but for the moment we have a rough idea what the price might be because futures of California allowances are trading on the GreenX at $13 per ton (the minimum price in the program is set at $10 per ton).

Assuming a slightly higher market price of $15, we can project the following:

One other detail to note is that the fiscal year (FY) runs from July-June, whereas the years in the graph above are calendar years.  This means that the Governor's budget for FY 2012-2013 counts all of the auctions occurring in 2012, and half in 2013, so the total is slightly higher than it will be for the following FY.

Bottom line: revenues from the state auction are projected to be over $500 million per year over the next three years.  These must be used to implement AB 32.