Now that the 2012 presidential elections are well behind us, investors and developers with their sights on clean energy technology markets are settling down to figure out the regulatory and policy landscape moving forward into 2013.  As always, California could provide a glimpse of the future for much of the rest of the country.

In the election’s aftermath, the launch of the nation’s first “cap and trade” auction – occurring in California – seems serendipitous.  The auction is one of many programs helping to implementing the state’s 2006 landmark AB 32 law, also known as the Global Warming Solutions Act.  Will this market-based attempt to price carbon become a precursor for the rest of the country, or will it fall flat and give Republicans a political edge in the 2014 midterm elections?

Put another way, given the still fragile state of today’s economy, is now the time to impose a de facto tax on carbon?

If one listens to the California Chamber of Commerce, the answer is no.  Interestingly, the state Chamber actually endorses taking action to respond to climate change.  But this business advocacy group has filed a lawsuit taking issue with provisions of the law that require businesses to divert a portion of auction revenues to fund state programs.  Ironically enough, the California Public Utilities Commission is now proposing that a portion of these same revenues be rebated back to residential consumers, echoing the theories of “cap and dividend” first floated by Peter Barnes in his 2003 book, Who Owns the Sky? Early auction results showed a low carbon price of $10.09 per ton, a result of competing bids that sold out and an auction design that awards allowances on the lowest clearing price.

The results of these policy debates in California may influence the fate of the federal production tax credit (PTC) for wind power, a policy that clearly was caught in the crossfire of election-year politics.  The stop and go nature of policy support for renewables in the United States is costing the nation jobs, as several factories have laid off staff, and the American Wind Energy Association claiming that 37,000 new jobs hang in the balance.

Rumor has it that one “grand bargain” that may appeal across both sides of the aisle might be a longer extension of the current PTC for wind of around $0.02 per kilowatt-hour (3 to 5 years) in exchange for a final sunset on the subsidy (or a decline in the subsidy rate over time).  The rationale is that both wind and solar are now dropping in cost, and therefore “permanent” subsidies should not be necessary.  This may all be wishful thinking, however, as record low natural gas prices have made it more difficult for renewables to compete.  The renewable energy lobby also points out that fossil and nuclear technologies have received government assistance for decades, and could still balk at such compromises.

In any case, the election results, and the launch of the nation’s most advanced carbon reduction market, will likely prove to be fertile ground for new policy reform next spring.  And California’s cap and trade program could reveal some populist twists that will influence decisions made in Washington, D.C.

Without the support of a national policy and having faced numerous obstacles over the years, U.S. cap-and-trade programs have lingered, most of them managing to survive despite many setbacks.  With California’s upcoming launch of the nation’s first economy-wide carbon market, new vigor (and hope) is being injected into the struggle to develop and foster a carbon trading scheme in this country.

In 2010, Californians reaffirmed by a vote of 61% to 39% their intention to implement cap-and-trade auctions for greenhouse gas (GHG) emissions by 2012.  They are getting ready to hold a “practice” carbon allowance auction in August, followed soon by the first official auction in November.  A few months later, the state’s cap-and-trade program will formally kick off in January 2013, when GHG emissions will start to be counted against the cap.  But this achievement has not been without difficulties and court battles, with various neighborhood and environmental justice groups claiming that the program will allow industrial plants to avoid installing much tougher pollution controls. Originally scheduled to start in January 2012, the program was delayed one year to give the state’s Air Resources Board (ARB) extra time to make sure that all the necessary steps had been taken and to protect the program from potential market manipulation and fraud.

Championed by former Governor Arnold Schwarzenegger, the cap-and-trade program is the cornerstone of California’s effort to reduce GHG emissions to 1990 levels by 2020.  It will affect 600 power plants, factories, and other industrial facilities and accounts for one fifth of the planned cuts under the state’s 2006 Global Warming Solutions Act, AB 32.  In 2015, the state will include transportation fuels.  Besides setting an emissions limit on sources responsible for 85% of the carbon footprint, ARB is providing a financial incentive for investments in clean technology and energy efficiency initiatives.

But as the August auction is rapidly approaching, one key issue is emerging.  What is the state going to do with the revenues from this and future auctions held on a quarterly basis?  Considering that these auctions could generate as much as $1.8 billion in the first year and the state already has a $16 billion budget deficit, this revenue question has become a very serious matter indeed.  Although the law requires that the money be invested in carbon reduction programs, a fierce debate is already going on among the state’s lawmakers and other stakeholders, along with intense lobbying from various clean energy and environmental groups. Both ARB and the utility companies want the money to help offset the rate increases that will result from the trading scheme, while the California’s public utility commission proposes to return 90% of the revenues to customers as rebates and use the remaining 10% for energy efficiency upgrades in buildings.  Other proposals have included funding for California’s high-speed rail project, establishing a “green bank” for alternative energy projects, and (not surprisingly) reducing the state’s budget deficit. To complicate matters, the California Chamber of Commerce claims that the allowances are a form of tax, so ARB has no legal right to impose it.

As these debates and arguments continue to rage in the coming months along with new amendments, California’s cap-and-trade program should send a strong message to the U.S. government that the time has come to reconsider a national carbon trading scheme and join other major economies, such as the European Union (with the world’s first and largest cap-and-trade system), Australia (which passed a carbon tax in 2011 that will shift into an emissions trading scheme in 2015), and China (which plans to start seven pilot carbon emissions trading programs in five major cities and two provinces in 2013). The success of the California carbon market could have a significant impact on the future policy decision-making of adopting a nation-wide carbon trading scheme in the United States.