UPDATE 2-California's carbon permit auction beats expectations

Feb 22 (Reuters) - California's largest greenhouse gas-emitting businesses paid $13.62 per metric tonne (1.1 tons) for the right to release carbon, narrowly beating market expectations in the state's second carbon permit auction.

At the state-run auction, California managed to sell all of the nearly 13 million carbon permits it offered to cover emissions for this year and less than half of the roughly 9.6 million permits it offered to cover 2016 emissions, the California Air Resources Board (ARB) said on Friday.
Allowances to cover 2016 emissions cleared the auction at the lowest allowable price under the program's rules, $10.71 per tonne amid weak demand, the ARB said.

The quarterly allowance auctions are a critical component of the state's cap-and-trade program, the first of its kind in the United States. It uses market mechanisms to reward companies that figure out ways to reduce pollution below levels set by the government, and serves as the backbone of California's effort to cut emissions back to 1990 levels by 2020.

California hopes its climate change program will serve as a model for other states and the federal government.

Environmentalists and market participants hailed the auction results as a success.
"Today's results represent another successful chapter in California's story of cutting pollution and moving towards a clean energy economy," said Derek Walker, an associate vice president at the Environmental Defense Fund.

"The results also demonstrate that this is a strong, viable carbon market," he said.
Jeff King, managing director of environmental markets for Scotiabank, also hailed the results, noting that the clearing price was more closely correlated with the secondary market price for allowances than it was at the program's inaugural auction in November.

STRONG DEMAND
King said that strong demand for the 2013 vintage allowances was a sign that the new market is developing well.

"The 2.47 times subscription rate is a bullish indicator for future auctions," he said.
At the first auction, demand only barely outstripped supply.

Emilie Mazzacurati, managing director of climate consulting and research firm Four Twenty Seven, said she expects participation to grow again at the next auction, which is scheduled for May 16.
"I think a number of compliance entities that had waited out the first auction have now jumped on the bandwagon and that the financial sector is taking more of an interest in the market."

Banks and other financial institutions upped their participation at this auction, purchasing almost 12 percent of the current year allowances offered, up from about 3 percent in November.

REVENUE
The sale of permits raised about $84 million for the state, an ARB spokesman said, money that will deposited into a new state-run greenhouse gas reduction account.

That money will be added to the nearly $54 million it raised from the sale of allowances at the November auction.

California regulators are currently weighing how to allocate those funds and are holding a series of forums around the state to receive input from the public on how it should be spent.
The next public workshops are scheduled to take place in Sacramento on Monday and in Los Angeles on Wednesday.

California Governor Jerry Brown is expected to release his plan for spending the revenue to the legislature in May, the ARB spokesman said.

But not everyone agrees that California should be raising money from the sale of carbon allowances.
In November, the California Chamber of Commerce sued the ARB, claiming it lacked the legal right to raise revenue through the auctions.

The state's largest business group said the carbon permits should be handed out to businesses freely.
Last week, the National Association of Manufacturers, the nation's largest manufacturing trade group, said it would join the lawsuit on the side of the California Chamber of Commerce.

Environmental organizations including the EDF and the Natural Resources Defense Council have intervened in the suit on the side of the state, saying the auctions are necessary to price carbon correctly and raise revenue to support clean energy.

A hearing in Superior Court in Sacramento County is scheduled for May 31.