Demand Plummets for California 'Cap and Trade' Pollution Credits

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The Phillips 66 oil refinery in the Contra Costa County town of Rodeo.  (Craig Miller/KQED)

SACRAMENTO — California's ambitious efforts to reduce greenhouse gas emissions are taking a hit as demand has plummeted for pollution credits that are supposed to fund the initiative.

Only about a tenth of the available pollution credits were sold in an auction last week, according to results released Wednesday by the California Air Resources Board. Gov. Jerry Brown's administration says revenue from the program was $600 million short of the $2.4 billion anticipated in the current fiscal year.

Brown built a cushion in his budget proposal, but the shortfall will still force the Democratic governor and state lawmakers to scale back their ambitions for the money. A quarter of the revenue is earmarked for Brown's high-speed rail project, with the rest funding a wide variety of programs aimed at reducing emissions or mitigating the damage from climate change.

What programs to fund and how much to spend will be the subject of negotiations with the Legislature, said H.D. Palmer, spokesman for Brown's Department of Commerce.

California launched the pollution-restriction program in 2012. Known as cap and trade, the program is designed to control emissions of heat-trapping gases and to spur investment in clean technologies. It limits how much pollution businesses can spew, making them buy permits, which are auctioned quarterly or sold on the secondary market.


Dave Clegern, spokesman for the Air Resources Board, declined to discuss what factors may contribute to the softening demand or whether the lawsuit played a role. But he said officials aren't concerned.

"We believe the program is functioning as it's supposed to, and we anticipated that there would be ups and downs, as there always are in markets," Clegern said.

Softening demand first appeared in February, when about 95 percent of the available credits were sold. It was the first time since quarterly auctions began in 2012 that any credits were left unsold.

In last week's auction, California and its trading partner, the Canadian province of Quebec, offered 67.7 million pollution credits for immediate use and 10 million for use in 2019 and beyond. California sold 6.1 million for current use, with all the revenue going to utilities, and 914,000 for future use, which netted the state only about $10 million.

The plummeting demand for pollution credits comes as a state appeals court considers a challenge to the program by the California Chamber of Commerce.

The 3rd District Court of Appeal in Sacramento asked for briefings in the case, which were filed this week, and could schedule oral arguments at any time, said Loren Kaye, who is handling the suit on behalf of the chamber. The chamber and Morning Star Packing Co. argue in the lawsuit that if the program is a tax, it is illegal because it was approved by a simple majority of the Legislature rather than the two-thirds majority that is needed to approve a tax.

AP writer Juliet Williams contributed.