Josh Margolis Comments: California Poised To Enter Carbon-Trading Market

December 16, 2010, The San Francisco Chronicle Online

Today could be seen as the biggest day yet for California’s climate change law, assuming, as expected, the state Air Resources Board signs off on the rules to implement it.

It will also be a big day for Aaron Singer, CEO of San Francisco startup Pacific Carbon Exchange, which is engaging in an enterprise thought dead in the water not so long ago: carbon trading.

"It’s the official starting gun for California and for Western regional carbon markets," Singer said. "It means we get to make this business a growing reality."

Central to the law, which goes into effect in 2012, is a "cap and trade" system designed to limit the amount of carbon from the state’s 500 largest emitters – mostly power plants, energy companies and heavy industry.

Companies emitting less than their state-mandated limit can trade their unused allowance – also known as carbon credits, or offsets – with companies that may be seeking to emit more than their mandated share.

"This is a significant milestone," said Josh Margolis, CEO of Cantor CO2e, a San Francisco offshoot of New York’s Cantor Fitzgerald, referring to the board’s expected action. "In the trading world, it’s been a decadelong anticipation."

With the Bay Area Council serving as the firm’s incubator, Singer has been working on its trading infrastructure for the past two years and is in the process of obtaining the certifications and accreditations from the U.S. Commodities and Futures Exchange Commission.

In the meantime, PCarbX, as it is known, plans to begin some futures and options trading next year, pending a full rollout when the bell officially rings in January 2012.

In September, it also signed a memorandum of understanding with the Shanghai Environment and Energy Exchange to explore the establishment of more carbon markets in the United States and China.

Other entrants: PCarbX is not alone. In addition to Cantor CO2e, others in the "environmental commodity" business who are reported to be coming to California include the global Intercontinental Exchange and the Green Exchange, both with U.S. headquarters in New York. "We expect healthy competition," Singer said.

"As a San Francisco-based entity with ties to policymakers, they’re in a unique position," said Adam Raphaely, director of environmental markets at Karbone, an environmental credit brokerage and project finance company in New York. "We see a potential relationship there."

Neither is California alone, even though Congress and the Obama administration gave up on a national cap-and-trade policy this year. The , a cap-and-trade program, which includes several Western states and Canadian provinces, is due to go into effect – also in 2012.

Still, for all the anticipation, carbon trading here is likely to start small, especially as the Air Resources Board is initially giving emission allowances away for free, rather than the $10 minimum per ton the agency had proposed in its rules. And companies don’t necessarily have to trade through exchanges.

"You won’t see a big bang, but, rather, a buildup in intensity," said Margolis, who has estimated the market could be worth anywhere from $3 billion to $58 billion by 2020 – the target year for California’s emissions to be lowered.

"This is much more than simply a business opportunity," Singer said. "We’re here to serve the aims of AB32 and help the next generation of clean tech investment for our state."

Gaining on us: Time will tell whether AB32’s full steam ahead provides the "certainty" private investors say they need to pull the trigger on more cash for California clean tech.

California’s law is the key reason the state leads the other 49 in clean-tech venture capital, with more than $1 billion in the second quarter of 2010. That accounts for 70 percent of total U.S. clean-tech investment, according to a "white paper" just published by the Bay Area Economic Institute.

Pats on the back aside, the paper goes on to point to other nations, notably China and Germany, which "are adopting policies and providing governmental financial support that are in some cases equally or more aggressive and, in the process, are creating globally competitive clean tech sectors."

While "China’s strong position in particular raises policy and economic issues for California," the country’s "growing demand for clean tech goods and services" presents an added opportunity.

But, "should California fail to wwwuce clean tech companies that aggressively compete in both domestic and global markets, other countries will readily fill the void, costing California jobs and growth."

Marching orders received. Details, in a 52-page PDF, at links.sfgate.com/ZKSR.

Feeling (a tad) better: Bay Area CEOs are feeling more positive about the local economy. Some are even looking to hire over the next six months.

However, they also "expect the current status quo of slow growth and recovery to continue," according to the latest survey from the Bay Area Council.

Based on answers from 473 CEOs and senior executives in the nine Bay Area counties last month, 47 percent think economic conditions are better than six months ago, and more than half expect the economy to improve further in the next six months.

Not enough for 58 percent of the bosses who expect their workforces to remain the same for a while longer. But just over a quarter, including 41 percent in San Francisco, said they are likely to hire in the next six months. Half of the larger companies, with more than 10,000 employees, said they’ll be adding to their rolls.