History in the Making: California's Cap and Trade Auction

Today, amid much controversy, California begins an experiment to reduce climate change. The state will start rationing the amount of greenhouse gases companies can emit. How it works: The California Air Resources Board has set a cap on the volume of carbon emitted by more than 400 big industrial polluters. The cap will decline each year. To stay under the cap, the polluters will have to reduce their emissions or purchase carbon credits. State officials say it's a flexible, market-based approach that encourages creativity. The cap-and-trade plan is a central piece of California's 2006 global warming law, AB32, a group of regulations meant to significantly reduce the state's greenhouse gas emissions.

Businesses are required to cut emissions to cap levels or buy allowances from other companies for each ton over the cap that is discharged annually. If a business were to cut emissions below the cap, it could profit by selling its extra allowances.

For the first two years of the program, large industrial emitters will receive 90 percent of their allowances for free to allow companies time to employ new technologies to reduce emissions. The cap, or number of allowances, will decline over time in an effort to drastically reduce greenhouse gas emissions by 2050. California expects to raise up to $1 billion in the market's first year and billions of dollars from selling carbon credits over the next several years. (The amount is expected to grow considerably in 2015, when oil refiners will have to buy credits to cover emissions from cars and trucks.)

The program's first auction today is being closely watched as it is history making. With California ranked as the eighth largest economy in the world, it's going to be the largest climate experiment undertaken in the U.S. Only the European Union has executed a similar plan in terms of scope.

California's most powerful business lobby filed a last-minute lawsuit Tuesday. The lawsuit by the California Chamber of Commerce challenges the validity of the state-run auction. The Chamber, which has been protesting the auction for months, says the sale is really an unconstitutional tax and is trying to eliminate future auctions which are set for regular intervals over the next eight years - the next set for February. Even though today's auction will go ahead as scheduled, the chamber's lawsuit could have a critical effect on the bidding.

It will be interesting to see what occurs today.

Photo: David McNew/Getty Images