On August 30, 2012, the California Air Resources Board (CARB) and about 150 market participants held a test auction for the purchase and sale of California carbon allowances (CCAs). The California state legislature passed Assembly Bill 32 (AB 32) in September 2006 requiring the state to reduce greenhouse gases emissions to 1990 levels by 2020, a 17 percent reduction. California’s auction is part of a cap and trade program designed by CARB. California’s cap and trade program is just one piece in California’s efforts to meet the 17 percent reduction required under AB 32 by 2020.

In sum, a carbon allowance allocation (see our accompanying Client Alert “Client Alert: AB 32 and Cap and Trade Design Basics”) and the emissions offset program (see our accompanying Client Alert “Client Alert: AB 32 and Offset Basics”) under AB 32 create the largest North American carbon market – but elements of the California program, such as specific auction rules, unlimited banking, limited use of offsets, and certain cost containment measures, will undoubtedly shape trading strategies different from those in existing carbon markets. To understand the California carbon market, it is therefore important to understand the auction and the auction rules.

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Client Alert 2012-224