By Rory Carroll
SAN FRANCISCO (Reuters) - California is set to unveil a new weapon in its fight against global climate change on Wednesday when it holds its first sale of carbon emissions permits - a landmark experiment that it hopes will serve as a model for other U.S. states and the federal government.
The state's carbon auction is a key step in the initiation of its "cap-and-trade" program, a policy where the state sets a limit, or cap, on the amount of heat-trapping gases released by manufacturers, oil refineries, electric utilities and other large emitting businesses.
Those companies can then either reduce their emissions or purchase carbon permits, also known as "allowances," on the open market from companies that have extras - the "trade" part of cap and trade. The number of allowances in the system will decline over time.
Environmentalists have long advocated cap-and-trade as a market-based means of limiting greenhouse gas emissions. Thirty European countries have been using it since 2005, and markets are operating or in development in Australia, China, Japan, Kazakhstan, New Zealand, Quebec and South Korea.
With Superstorm Sandy drawing attention to climate change and a strong Democratic showing in last week's election, carbon emission limits could again be on the national political agenda in the United States. But past efforts to implement cap-and-trade nationally have faltered in the face of opposition from congressional Republicans and others who say it will increase energy costs.
The California Chamber of Commerce on Tuesday filed a lawsuit to stop the California auction of emissions permits, contending that the state had exceeded its authority in making the program a revenue-generator. Sale of carbon allowances is expected to generate at least $1 billion a year.
The cap-and-trade program, which initially covers 350 businesses, is a key component of AB 32, California's landmark 2006 law, which called for the state to cut its greenhouse gas emissions back to 1990 levels by 2020. That's a reduction of about 15 percent.
"The cap-and-trade auction is a huge milestone for California because it kick-starts a program that is the strongest and boldest move yet in the U.S. to protect public health and the environment from climate change," said Fred Krupp, president of the Environmental Defense Fund.
California is responsible for about 3 percent of global greenhouse gas emissions, so influencing others to follow suit and eventually link to the California market will be critical to the program's success.
"Our overall impact is small," said Mary Nichols, chairwoman of the California Air Resources Board, the agency implementing the program. "What we do will not solve the problem. But we want to demonstrate that this type of system can work."
Cap-and-trade supporters believe California's market is launching during a favorable time politically.
Environmentalists were buoyed by the re-election of state Senator Fran Pavley, the author of AB 32 who survived a tough challenge in a redrawn Southern California district. Democratic electoral gains last week, which are likely to give the party a super-majority in the state legislature, also may bolster support for the program.
The re-election of President Barack Obama ensures the federal government will not interfere with the program. And it is possible that legislation creating a carbon tax or national cap-and-trade program could be introduced in the coming years.
But California's market is still highly controversial and lawyers on all sides expect the state Air Resources Board to face challenges in court.
The companies that operate California's 13 oil refineries have been vocal opponents of the program, arguing that it could lead to the closure of five to seven refining facilities.
Oil company opposition is likely to increase when the program expands in 2015 to cover emissions from distributors of transportation and home heating fuels.
Wednesday marks an important day for the new market, but it may take years before its success or failure can be truly measured.
"It's a very long-term effort," said Richard McNeil, an attorney with Snell & Wilmer, which represents California electric utilities.
"I think you'll see some tumultuous times market-wise and I think you'll see additional legal challenges. The big question is - will we ultimately see the benefits? It will be a while before anyone can answer that."
(Reporting By Rory Carroll, Editing by Jonathan Weber and Stacey Joyce)