Traders, state officials applaud first-ever swap in Calif.

Much to the surprise of state officials, California's carbon market launched itself this week when Barclays Bank PLC and NRG Energy Inc. completed what was the first-ever swap of a greenhouse gas emissions permit to be issued by state regulators after cap and trade goes live in 2012.

The deal marks the first time a California carbon allowance has been traded and was viewed by many as a symbolic moment. But it also represented a real deal, with Barclays and NRG Power Marketing, an NRG subsidiary, agreeing to the first set of terms for the forward sale of a California emissions permit.

"I think we got something pretty cool started," said Kedin Kilgore, head of U.S. emissions trading at Barclays Capital. "A market has been launched."

That the trade occurred well before the California market goes live -- and even before the state Air Resources Board (ARB) approves rules to govern that exchange -- should not be considered a surprise, Kilgore said, as many players will want to get ahead of trading as soon as they can.

Kilgore gave much of the credit for the early deal -- known as a "tombstone" trade -- to state regulators for having given consistent signals that the market is on its way. Just as significant was the message sent by California voters just weeks ago when Proposition 23, which would have delayed the onset of a carbon market in California, was easily defeated at the polls.


"The ARB should be pleased that they have provided enough certainty and have done their jobs well," Kilgore said in an interview. "This couldn't have happened if they hadn't done a good job."

Other traders were quick to congratulate Barclays, which did not disclose whether Princeton, N.J.-based NRG was the buyer or seller. Josh Margolis, CEO of CantorCO2e in San Francisco, wasn't surprised that the first player in was NRG, which is the largest independent power producer in the country.

"Kudos to Barclays and NRG," he said. "This is a positive indication that we will see a robust market well in advance of Jan. 1, 2012."

He added: "Not surprisingly, the early trades will involve liquidity providers. Permit holders subject to the reduction requirements, those that make products and sell power in or into California, will begin to participate in this market before the summer of 2011."

Early stirrings in a potentially big market

Assuming it passes at the ARB's December board meeting, California's cap-and-trade program will go live in stages, with utilities and industrial sources of emissions regulated starting in 2012 and the transportation sector (including cars and fuels) subject beginning in 2015 (ClimateWire, Nov. 1).

When it gets under way, traders say, the California market will easily be the biggest in the United States, due to the absence of federal legislation and its application to all sectors of the economy (surpassing the Northeast's market, which applies only to utilities).

Like Kilgore, Margolis gave credit to state architects for how they intend to structure the marketplace (though he did add a number of provisions he thinks the board should change from the draft rule before voting in December).

"By establishing rules by which offset project developers must play, California will affect carbon credit project development in other states and countries," Margolis said. "California's message: We are happy to have your business if you play by our rules."

California permits for delivery in December 2012 -- which is the agreement term between Barclays and NRG -- traded at $11.50 a ton yesterday, Kilgore said, adding that there had been "quite a bit of market response" following the announcement.

"The emitters need a way to begin managing their risk," he said, explaining that environmental markets tend to begin trading "well ahead" of the compliance period. "They know they have this compliance obligation, and they now know largely what shape it's going to take.

"If they wait until that year to start, they may run too much risk."

At the ARB, the reaction was enthusiastic. "We're pleased to see these early signs of confidence in the market for California's efforts to promote the development of a clean energy economy," said Stanley Young, an agency spokesman.

Sullivan reported from San Francisco.

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