Cap and Trade in California

Data from US EPA

Cap and Trade is officially lunched in California, the first auction of carbon allowances was yesterday.The state deemed the auction a success as 23.1 million carbon allowances for 2013 sold at $10.09- the lowest market clearing price.  Back in 2006 enabling legislation (AB 32) was passed to create California’s carbon cap and trade system that was launched Wednesday despite last minute appeals by business associations to the Governor. The California Air Quality Control Board has set an annual limit, the cap, on the carbon dioxide (CO2) emissions produced by large factories, power plants and oil refineries in the state. The cap is scheduled to decline 1% in the first two years and 3% each year after that so that CO2 emissions in the state will be reduced in a systematic fashion.

 

Though the requirement does not go into effect until January 1, 2013, yesterday, after 6 years of planning and program design, California had its first auction for 62.6 million metric tons of CO2 called carbon allowances (23.13 metric tons for 2013 and 39.45 metric tons for 2015) on  an electronic trading market. Sold were 23.1 million carbon allowances for 2013 in addition to 5.6 million allowances for 2015. The state will operate the market each quarter so that companies subject to the regulation can purchase carbon allowances.  Each business must hold the number of allowances determined by the state, based on the standard emissions from their type of business or facility, so while this program was developing there was no incentive to install technology to reduce CO2 and there was an incentive to maximize annual production. At first,  all the allowances are free for power plants and 90% of the allowances are free for businesses, but the number of allowance that  are free will decrease to 75%  in 2015 and go down from there. The total CO2 emissions for the state were only about 2% over 1990 levels in 2010 (though they had been considerably higher before the recession).

Regulators and the Legislature hope and believe that gains in energy efficiency spurred by the program will outweigh any higher costs. Certainly switching from coal power generation to natural gas fired power generation can reduce CO2 generation by utilities by 44% according to data from the US EPA.  The idea for a cap and trade program was modeled on the European Union’s Kyoto accord system. Though Europe has reduced the generation of CO2 within its borders, the consumption of carbon has not according to “The Carbon Crunch: How We’re Getting Climate Change Wrong-and How to Fix It” by Dieter Helm. In a world whose atmosphere is interconnected a cap and trade program appears to have the perverse incentive to drive energy intensive industries outside its borders.

With the Koyoto accord in place CO2 emission worldwide continued to grow. In 2011 the top four world generators of CO2 emission from fossil fuels were in descending order China, the United States, the European Union and India who edged out Russia to take the number four slot. This is a vastly different picture than existed in when the Koyoto Treaty was first contemplated and now China’s newly elected President Hu Jintao has vowed to double the country’s gross domestic product and per capita income by 2020 from 2010 levels during his term of Presidency. This means an increase in electricity production using predominately coal fired power plants in China.

From 2010 to 2011 China increased their emissions of CO2 the mostcontributing almost three quarters of the total global increase, with its emissions rising by 720 million metric tons, or 9.3% to 8.46 billion metric tons of CO2, primarily due to higher coal consumption. India’s emissions rose by 140 million metric tons or 8.7% to 1.75 billion metric tons. CO2 emissions in the United States in 2011 fell by 92 million metric tons of CO2, or 1.7% to an estimated 5.32 billion metric tons. California’s carbon market represents 342 million metric tons less the portion of transportation that are automobiles or about 4%-5% of the net CO2 emissions for the United States. Only commercial and industrial facilities that emit more than 25,000 tons of CO2 each year are subject to the cap.

Companies subject to the cap and trade regulations have four choices. The first is the intended goal; reduce CO2 emissions by improving energy efficiency, utilizing lower carbon fuels, carbon capture or other technologies. The second option is to buy carbon allowances from California at the market determined rate. California will profit under the program by selling the California carbon allowances that each company subject to the regulation will need to continue to operate in California.  The idea of the carbon allowance market is to both to price the carbon allowance and raise revenue for the state. The third option is known as "carbon offsets." Companies can pay other organizations to reduce greenhouse gases within the United States. The fourth option is to reduce CO2 producing operations within the state. California is hoping that the transfer of production to other locations will not occur, but the experience in Europe and the United Kingdom has not shown this. Taxing the carbon content of products might be a more direct method to control CO2 generation and more effective method of reducing CO2 production worldwide and would certainly generate badly needed revenue for California. 

California Implements Cap and Trade Program

On Thursday, October 20, 2011 after a long public hearing and meeting the California Air Resources Board unanimously voted to adopt the nation's first state-administered cap-and-trade regulations for greenhouse gases. Cap-and-trade is the centerpiece of AB 32, the Global Warming Solutions Act of 2006 a California law that establishes a wide reaching program of regulatory and market mechanisms to achieve quantifiable, reductions of greenhouse gases (GHG) that are intended to be cost effective. This law establishes a statewide GHG emissions cap for 2020, based on 1990 emissions. Though Cap and Trade was not part of the actual law, it was added by the California Air Resource Board in their Regulations. California sees itself as leading the way in cap and trade legislation and an example to the nation of the potential benefits and concerns and problems with this particular approach to attempt to prevent climate change by controlling CO2 emissions. A second phase of compliance begins in 2015 and is expected to include 85% of California's emissions sources.

Thought there were many other voices the prevailing view at the meeting was California is leading the way to the future. California intends to show by example to other states and the federal government that it is possible to regulate greenhouse gas emissions while protecting its economy and fostering a new green economy and industry. According to others, California is taking a very big risk with their economy for uncertain results. There is the strong feeling amongst journalists, regulators and NGOs that the vote was closely watched by other states and, if the program is deemed successful, it will serve as a model for future markets. If you recall the "American Clean Energy and Security Act” is HR 2454, also known as the Waxman-Markley energy bill, or simply as "ACES" was passed by the US House of Representatives in 2009 and died in the senate. The bill included a cap-and-trade global warming reduction plan designed to reduce carbon dioxide emissions in the U.S and also required “polluters” to buy permits to emit a certain amount of carbon dioxide.

Within California there is the strong belief that people watch what California does and emulate it. The California regulators believe that cap-and-trade programs are going to spread to other states and regions and the design features developed for the California program will be adopted in other states and regions with the federal government finally adopting the program. The California Air Resource Board sees their work in creating 262 pages of regulation as ground breaking and likely to change the country. These regulations imply a shift away from carbon based fuels. It is envisioned that this will support the creation of new green-tech jobs and financial certainty for the renewable energy industry even as there is a strong national push to further develop shale source natural gas to move power generation away from the coal fired utilities built in the mid 1900’s and for a reduction in the size of government. At least 15 states now produce shale gas and others may join them. The largest shale area, the still-emerging Marcellus, covers much of the Northeast and already supports 140,000 jobs in Pennsylvania alone. Many of the jobs created recently in Texas are related to the expansion of shale gas exploration and development.

United Nations Climate summit will be held November 28-December 9th 2011 in Durban South Africa. The Kyoto Protocol, which commits developed countries to cut their emissions, is set to expire in 2012. After both the Copenhagen (2009) and Cancun (2010) Climate summits failed to produce a legally binding climate treaty, delegates to the Durban talks are under immense pressure to produce some kind of deal that will be acceptable to both rich and developing nations. However, it is reported that cap-and-trade concept is losing support among the pervious signers of the Kyoto treaty and China and India who are now major producers of greenhouse gas because of concern about jobs, costs and bureaucratic complexity.

The “emerging nations,” including China and India want an extension of Kyoto, which required the industrialized nations to cut greenhouse gas emissions by 5.2% below 1990 levels from 2008-12. The world's two largest greenhouse gas emitters are China and the United States. The U.S. never ratified Kyoto, arguing it should contain 2012 goals for emerging economies and would cost U.S. jobs. China was exempted as an emerging economy, and though it is now the largest greenhouse gas emitter on earth, it wants to remain exempted from reducing or even stabilizing greenhouse gas emissions under any new agreement. In September India announced that it would not accept any legally binding limits on greenhouse gas emission, and Japan announced that they are reconsidering plans to cut carbon-dioxide emissions by 25% by 2020 due to closing of a significant portion of its nuclear power generation, and the costs of the carbon-credit programs that required the spending of almost $11 billion on carbon abatement programs in other countries. Overall, expectations for the future of the Kyoto Protocol are low and some doubt whether if a second commitment period is feasible with only support from EU which accounts only around 11% of the world’s greenhouse gas emissions and is itself reconsidering its nuclear power generation after the Fukushima Daiichi nuclear reactors were damaged after the quake. If nuclear reactors are going to be phased out as low greenhouse gas emission power generation there is no way to achieve carbon reductions without reducing the size of the economy, the standard of living or the size of the population.

The California Cap and Trade program requirements will help the current crop of California solar projects. If you will recall, the Department of Energy recently issued its final round of loan guarantees before the program ended and these final four loans included three generation project in California.
California Valley Solar Ranch Project a $1.237 billion loan guarantee to allow SunPower Corp to borrow the money to build a 250-megawatt photovoltaic electricity generating array in San Luis Obispo County, California using sun tracking technology to increase electricity output. The power will be sold to Pacific Gas and Electric Co. and will generate enough (very expensive) electricity to power 64,000 homes and will allow SunPower to increase demand for their panels and maintain or increase production. Construction employment will be significant, but permanent jobs will be few. The panels do not need much operation.

California Struggles with Implementing Their Cap and Trade Program

AB 32 the Global Warming Solutions Act of 2006 is a California law that establishes a wide reaching program of regulatory and market mechanisms to achieve quantifiable, reductions of greenhouse gases (GHG) that were intended to be cost effective. This law establishes a statewide GHG emissions cap for 2020, based on 1990 emissions. Though Cap and Trade was not part of the actual law, it was added by the California Air Resource Board in their Regulations. California sees itself as leading the way in cap and trade legislation and serves as an example to the nation of the concerns and problems with this particular approach to attempt to prevent climate change by controlling CO2 emissions.

The cap and trade program as outlined the Air Resource Board represents only about 20% of the greenhouse gas emissions reductions required by AB 32, and will go into effect in 2012. Almost 80 % of the decrease in carbon reductions in the state will be achieved through higher fuel-efficiency standards for vehicles, increased energy efficiency and conservation, renewable-energy mandates and other measures throughout the California economy.

The Air Resource Board had been sued by environmental justice groups concerned that poor communities located near California’s largest emitters could actually face increased exposure to pollution under cap and trade. The lawsuit contends that the air board failed to do an adequate analysis of possible alternatives to the cap-and trade program, as required by the California Environmental Quality Act.

The Judge in the case ruled that the Air Resource Board had only done a cursory consideration of alternative only giving serious consideration to cap and trade as part of the state’s plan to reduce greenhouse gas emissions. The Judge in the case ordered the Air Quality Control Board to stop work on the regulations and consider other options. The Air Resource Board appealed that decision to the appeals court and continued setting up cap and trade while they have whipped out an expanded more thorough analysis of the alternatives considered in the original report. The appeals court Judge has allowed them to continue implementing the cap and trade program.

Both Sierra Club California and the environmental justice organizations said they could support alternatives that include requiring large emitters to cut back on the amount of carbon dioxide at the site of their plants. The cap and trade outline creates credits for California emitters that exceed emission limits but fund emissions- reduction programs, even if they are in other states or countries. Instead some are pushing for consideration of alternatives to cap and trade could include increased energy efficiency in buildings, significantly increasing renewable- energy sources in the state, and a traditional tax that would be placed on carbon emissions.

A carbon tax is straight forward, honest, not subject to the same manipulation that can distort the allocation of carbon credits and finally it raises funds directly for the state of California that is so in need of revenue. The problem with a straight forward carbon tax which on the surface appears to have merit as a way to reduce carbon dioxide release while raising state revenue is California is essentially California can only create or raise a tax by a supermajority. In 1978 Proposition 13 the "People's Initiative to Limit Property Taxation" passed and became article 13A of the California state constitution. The California form of direct democracy allows initiatives that obtain enough signatures to be placed on the ballot and voted on directly by the residents. The proposition decreased property taxes by restricting annual increases of assessed value of real property to an inflation factor, not to exceed 2% per year while using either the 1975 value or the sale price which ever was later. It also prohibited reassessment of a new base year value except for a change in ownership. To protect themselves from increasing property taxes from rapidly increasing property values, the people essentially eliminated the most stable source of revenue and made the imposition of any tax all but impossible.

So as the California Air Resource Board points out, in the case of a carbon tax, the uses of the revenues are restricted by state law and thus could not be used to offset increases in energy costs to low income consumers or encourage approved industries. “The most challenging constraint for a tax approach owes to the requirement that taxes must be approved either by legislative supermajority or voter initiative. Such measures would require time and potentially substantial resources to pass, and may be politically infeasible.”

Cap and trade is an immensely controversial proposal that at the national level has split along the traditional lines of environmentalists versus industry. It was the centerpiece of a plan to reduce greenhouse gases that passed the House in 2009 but subsequently failed in the Senate. It was always reported that support of cap and trade was pro-environment and those apposing were polluters wanting to trash the world. There were always problems with cap and trade and similar programs and always environmentalist who supported a direct tax on carbon and various European Union members have used carbon taxes as part of their strategies. At this time supporters of AB 32’s cap-and trade program tend to be clean-energy businesses, investment firms and other business groups in California with a vested financial interest in profiting from the green economy and regulators. That pretty much tells you who will benefit most from such a program; however the alternatives are limited by Article 13A. Small business interests in California were very alarmed by a Center for Small Business at California State University report titled “Cost of AB 32 on California Small Business-Summary Report of Findings” that outlines the financial impacts of implementing AB 32 to the economy and people of California. The report concluded that when the program is fully implemented, the average annual loss in gross state output from small businesses would be $182.6 billion, approximately a 10% loss in total gross state output.

Even when fully implemented AB 32 is not going to stop climate change, though it may contribute to an amelioration of the increase in carbon dioxide. Even this modest reduction in CO2 emissions will not be met if the production of CO2 just moves out of state along with the economic activity that is producing the emissions. Greenhouse gases absorb the sun’s energy, allowing less heat to escape back to space, and 'trapping' it in the lower atmosphere. Many greenhouse gases occur naturally in the atmosphere, such as carbon dioxide, methane, water vapor, and nitrous oxide, while others are synthetic. Water vapor is the most pervasive of the greenhouse gasses and subject to weather and changes in temperature. The cap and trade program is probably not going to have any discernable impact on total greenhouse gas concentrations on earth. However, creating a cap and trade system does create a market where “clean-energy” businesses, investment firms and other business groups that can profit from the marketing of these credits and regulators can increase their authority and funding. Instead it would be much better to directly tax carbon and use that money to prepare for the earth of our future.

Cap and Trade in California and Unemployment

Based on sheer size and population, California produces a significant volume of greenhouse gas emissions. If California were a country, it would be the 19th largest producer of greenhouse gas emissions in the world. However, on a per capita basis, California ranks 46th among the 50 states in greenhouse gas emission rates. While per capita electricity consumption nationwide has increased almost 50 percent since the mid-1970s, due to successful conservation efforts, California’s per capita electricity consumption has been relatively flat. According to the U.S. Department of Energy, the average household in California uses only 587 kilowatt hours per month.

California has been at the forefront of legislation to prevent global warming by reducing greenhouse gas emissions. AB 32, California’s Global Warming Solutions Act of 2006, establishes a comprehensive program of regulatory and market mechanisms to achieve real, quantifiable, reductions of greenhouse gases that were intended to be cost effective. This law establishes a statewide greenhouse gas emissions cap for 2020, based on 1990 emissions (a year when California had entered a recession), and grants to regulators broad authority to regulate to achieve these goals.

Under an executive order from Governor Schwarzenegger, the California Air Resource Board, CARB, will require utilities to produce a third of their power from renewable sources within a decade. California already has a rule that utilities obtain 20% of their energy from renewable energy sources by this year’s end, though it is not anticipated that goal will be reached. If fully implemented, the 33% renewable energy standard will remove between 12 million and 13 million metric tons of carbon dioxide per year, along with other pollutants, according to CARB. It also will be a major step towards meeting the targets of California's greenhouse gas reduction law, AB32. CARB estimates cost of implementing this regulation to be $2.5 billion, which would increase energy costs by about one cent per kilowatt hour, but cost over $200 per metric ton of carbon removed.

AB 32 allows CARB great latitude in developing approaches and regulations. The first round of regulations have already been implemented. They include CARB’s low-carbon fuel standard, restrictions on some refrigerants, increased landfill methane capture, truck efficiency programs, tire pressure program, reduction of greenhouse gases in consumer products, ship electrification at ports, reduction of perfluorocarbon from the semiconductor industry, and sulfur hexafluoride (SF6) reductions in non-utility and non-semiconductor applications. CARB is, also, allowed and encouraged to create a market-based “cap-and-trade” program which would be implemented by 2012. The proposed cap-and-trade program would cover the 600 largest sources of greenhouse gas emissions in the state, and is well under way towards implementation.

If you recall, the "American Clean Energy and Security Act,” also know as the Waxman-Markley energy bill, which was passed by the House and then stalled, modeled itself on the California plan. AB 32 serves as an experimental laboratory to the nation of the concerns and problems and possibly the results from attempting to prevent climate change by controlling CO2 emissions in this way. Under AB 32, CARB must determine how to achieve these reductions, within the deadlines. In 2008, CARB released a scoping plan outlining the measures that it would take in order to meet the 2020 emissions reduction requirement. As California unemployment climbed past 12% a movement began to suspend the enactment of AB 32. This legislation passed during better economic times has costs and impacts on business and is vulnerable to this kind of action.

Proposition 23, on California’s November 2010 general election ballot, would suspend the implementation and operation of AB 32, California’s Global Warming Solutions Act of 2006, until state unemployment rates remain at or below 5.5 percent for four consecutive quarters. That level has been reached three times since the state began compiling these statistics in 1976. Proposition 23 would suspend regulations already adopted under AB 32 and would also prohibit state agencies from continuing their adoption of new implementing regulations and related directives. This would punish any business or person who had already implemented technology and/or procedures to reduce their greenhouse gas emissions and create confusion.

While Proposition 23 would suspend AB 32 and its existing regulations, it does not push back or otherwise delay the 2020 aggregate greenhouse gas reduction target contained in AB 32. If Proposition 23 were to pass, the binding target of achieving 1990 greenhouse gas emissions levels by 2020 would become effective again once the suspension is removed. So, the minute the economy booms, all the regulations would become effective immediately. The incentive would be for California businesses to keep unemployment above 5.5%. Both candidates for governor have come out against the proposition, but I believe for different reasons. Suspending the legislation in this way would create an untenable regulatory and compliance environment. Perhaps the more direct path of taxing oil and other sources of greenhouse gasses would have been simpler to moderate during times of economic duress by simply reducing the tax to stimulate the economy. Stay tuned to California for more adventures in the economic and political impacts of greenhouse gas regulation.

CALGreen and LEEDS

I do not know if CALGreen is adding fuel to the fire that is currently the AB 32 debate in California, but back in January 2010 the California Building Standard Commission passed an amendment to the building code to create a state wide green building code in California to go into effect in January 2011. This green building code is known as CALGreen. The CALGREEN Code applies to all residential, commercial, hospital and school buildings, ensuring that every new building in California is built using environmentally advanced construction practices. While a mandatory code will allow California’s builders to build to a certifiable green standard without having to pay fees for third-party programs, compliance with the new standards will add to the cost of construction and difficulty in getting new housing permitted. This will increase both the volatility and ultimately cost of housing in California.

Various municipalities, such as San Francisco and Berkeley have mandated that new construction be LEED certified or in other ways “green” this is the first state wide standard for green building. If you recall, under AB32, California must reduce greenhouse gas emissions by 25 percent by 2020, returning them to 1990 levels. The mandatory CALGREEN code provisions will be inspected and verified by local and state building departments, who will have to be trained in the new standards (no doubt under stimulus funds for green jobs). This initiative is designed to reduce greenhouse gas emissions and conserve water, by incorporating a set of environmental standards into the existing building code. Buildings in California account for one-quarter of the state’s greenhouse gas emissions. The California Air Resources Board estimates that CALGREEN will avoid 3 million metric tons of CO2 equivalents in 2020 which is 5.6% of the reduction necessary to meet the goal. It will also reduce water use by 20% and divert 50% of construction waste to landfills. CALGreen requires:

20% mandatory reduction in indoor water use, with voluntary goal standards for 30%, 35% and 40% reductions;
Separate water meters for nonresidential buildings’ indoor and outdoor water use, with a requirement for moisture-sensing irrigation systems for larger landscape projects;
Diversion of 50% of construction waste from landfills, increasing voluntarily to 65% and75% for new homes and 80% for commercial projects;
Mandatory inspections of energy systems (i.e. heat furnace, air conditioner, mechanical equipment) for nonresidential buildings over 10,000 square feet to ensure that all are working at their maximum capacity according to their design efficiencies;
Low-pollutant emitting interior finish materials such as paints, carpet, vinyl flooring and particle board.

The U.S. Green Building Council (USGBC) currently offers a set of voluntary green building standards known as Leadership in Energy and Environmental Design (LEED) by far the most popular and well-known green building certification program in the nation. LEED operates as a point-based certification system, where building developers can reach the Certified, Silver, Gold and Platinum levels of ‘greenness’ in different ways hopefully appropriate to the local conditions. While the LEEDS point-based system allows flexibility for building developers, it has been criticized for allowing too much freedom in choice. Also, LEED certification requires an investment of money to pay for third party verification and periodic verifications. The CALGreen standards will be part of the building inspection process, the cost to train and implement born by the taxpayer instead of the builder and buyer. California could well end up like Europe, with laws to prevent new construction and expansion of existing home footprints.

Will Unemployment Stop AB 32

Yesterday, it was announced that California voters will decide the fate of the state's global warming and cap and trade bill, AB 32. Under AB32, California must reduce greenhouse gas emissions by 25 percent by 2020, returning them to 1990 levels. AB32's proponents call it a vital step in efforts to curb greenhouse gases and create green jobs that will serve as a model for other states of what the costs and benefits of a cap and trade/ climate change bill. Many groups have weighed in on the projected costs and benefits, but now, in true California fashion, the variously funded political action groups are bringing it to the ballot. The measure expected to be on November's ballot would suspend AB32 until California's unemployment rate, currently at 12.5 percent, stays at 5.5 percent or below for four consecutive quarters, which is a very aggressive employment target. The unemployed, energy companies and economic fears will be pitted against global warming fears and environmental activists.

High unemployment in California which has been hard hit during the recent recession combined with a report by Sanjay Varshney and Dennis H. Tootelian, Ph.D. of California State University, Sacramento that concluded when the program is fully implemented, the average annual loss in gross state output from small businesses alone would be $182.6 billion, approximately a 10% loss in total gross state output. This will translate into nearly 1.1 million lost jobs in California. Lost labor income is estimated to be $76.8 billion, with nearly $5.8 billion lost in indirect taxes. The increased costs generated by the AB 32 program, would force cuts in discretionary spending by 26.2%. The study’s cost analysis was based on the California Air Resources Board’s (CARB) findings, which revealed significant cost increases. The study found that the California Resource Board had significantly underestimated these costs. Unemployment in California is now 12.5% which translates to 2,303,000 people before the implementation of AB 32. If another 1,100,000 people are added to that total unemployment would reach 3,403,000 or 18.6%.

Circulating on cable is the NOVA program on AB 32. In a well produced program NOVA conducts interviews with Governor Schwarzenegger, skeptics and supporters of the plan, and ordinary citizens and businesspeople whose lives will change significantly when the new regulations take effect. The sense of urgency expressed by the Governor is acute, because he fully believes in the Global Warming models that project that California is particularly susceptible to the effects of climate change. The recently ended drought touted as a harbinger of things to come resulted in devastating wildfires and chronic water shortages in large sections of the state and fueled those concerns. While high unemployment has fuels the concerns for economic devastation resulting from the law. So the lines are drawn and now we get science and facts by popular vote. Reality in California.

Water, The Next Big Thing

While I know that spring arrives with a large list of work to be done to resolve moisture issues, repair damage and repair our gardens, I would like to draw your attention back to larger environmental issues on a rainy afternoon. Interest in the Cap and Trade is waning, especially as California struggles to come to terms with AB 32. Global Warming lost much of its urgency when it became Climate change and will continue to lose urgency as the coalition of believers breaks apart into its underlying camps. Nonetheless, Al Gore was incredibly effective in convincing a generation that carbon footprint was the key to saving the earth. Don’t get me wrong, the climate of earth does change. Energy use matters. The earth’s resources should not be squandered or mismanaged. However, carbon offsets are shell game.

Water is real. Our quality of life and life itself is dependent on our access to water. Mankind cannot survive without water. One of the world’s most critical problems is a lack of quality water. More than a billion people lack access to safe drinking water, and at least 1.5 million deaths, mostly among children underage five, are attributed to unsafe drinking water each year. The World Bank attributes 12 million deaths annually to the combination of foul water and poor sanitary conditions. People are dying today for lack of clean water. The projections for 2030 are for significant and potentially life threatening water shortages in certain parts of the world despite the fact that the earth as a whole has adequate fresh water supplies. Mankind expands and builds and fouls until he has surpassed the carrying capacity of the location. We do not stop when we should. Though I tend to distrust all long term modeling efforts for their simplifications and straight line projections; water planning ten and twenty years out is a standard practice in the US west and other water critical areas of the world. Water supply projection a decade or two out is a much simpler model than say climate projections, but still are impacted by non-correlated variables and limited knowledge of groundwater recharge and reserves that would make it difficult to accurately project water demand and availability. Nonetheless, water is a real issue and its importance will grow as continuing mismanagement of water resources is highlighted by growing populations. I point out the National Geographic Special Water Issue and the WWF glossy on Sustainable life for evidence of this.

In California, the combined demand for irrigated agriculture, expanding suburban footprint, habitat protection, and drought have stressed the water supply to the breaking point only pulled back from the brink of disaster by the heavy rains that came late this past winter. For more than a half a century the Central Valley of California has been one of the most productive agriculture regions of the world. However, irrigation uses about 80% of California water and there is no longer enough water to survive the seasonal and climatic variability that threatens a reliable water supply. On less than 1% of the total farmland in the U.S. the Central Valley produces 8% of the agricultural output (as measured by value). This is all made possible by a combination of surface water diversions and groundwater pumping. Approximately one sixth of the irrigated land in the United States is in the Central Valley (Bureau of Reclamation, 1994) and approximately one eighth of all groundwater pumped in the United States is pumped in the Central Valley (USGS, 2000). Though California has adequate water for human consumption, it is likely that this irrigated agricultural model is not sustainable since California is clearly mining their groundwater and has diminished the storage capacity of the central valley due to subsidence. The California papers have been filled with water issues, opinions, and arguments.

Suddenly, Bolinas, California is looking more prudent and less fringe with their limit on the absolute number of water meters for the town. (For the record it has been 580 meters for 30 years.) The town’s water supply comes from Arroyo Honda. The town has two backup reservoirs, but by late last winter, before the late season rains, it appeared as if Bolinas might run out of water before the next rainy season. In a rational attempt to live within their available resources, mandatory rationing went into effect last February, but was lifted after the rains restored the reservoir reserves. The rationing plan required that every household (or water hook up) use 150 gallons a day or less, regardless of how many people it supported. All businesses and the town's school were told to cut usage by 25 percent. To enforce this plan home meters were checked randomly every day. Exceed the limit and you got a written notice. Residents were allowed only two notices. The third time, a household’s water could be shut off. The town is a very closed community and succeeded in having 98% compliance with the rationing plan. The town is viewed in parts of California as a leader in water conservation and an indication of the future of the state. The water movement is forming. Mismanagement of water resources will set the stage for this movement.

The Costs of Cap and Trade in California

In a recent report by Sanjay Varshney, Dean of the College of Business Administration, California State University, Sacramento and Dennis H. Tootelian, Ph.D., Professor of Marketing and Director, Center for Small Business, California State University, Sacramento titled “Cost of AB 32 on California Small Business-Summary Report of Findings," the financial impacts to the economy and people of California to implement California’s greenhouse gas program was outlined. AB 32 establishes a comprehensive program of regulatory and market mechanisms to achieve real, quantifiable, reductions of greenhouse gases (GHG) that were intended to be cost effective. This law establishes a statewide GHG emissions cap for 2020, based on 1990 emissions. California has lead the way in cap and trade legislation and serves as an example to the nation of the concerns and problems with this particular approach to attempt to prevent climate change by controlling CO2 emissions.

The report concluded that when the program is fully implemented, the average annual loss in gross state output from small businesses alone would be $182.6 billion, approximately a 10% loss in total gross state output. This will translate into nearly 1.1 million lost jobs in California. Lost labor income is estimated to be $76.8 billion, with nearly $5.8 billion lost in indirect taxes. The study also found that in order to cope with the increased costs generated by the AB 32 program, consumers will be forced to cut their discretionary spending by 26.2%. The study’s cost analysis was based on the California Air Resources Board’s (CARB) findings, which revealed significant cost increases. The study’s findings are consistent with the Peer Review analysis that CARB commissioned, which also concluded that the cost of the AB 32 Scoping Plan would be significant, and that the California Resource Board had significantly underestimated these costs. Unemployment in California was at 12.2% in August which translates to 2,248,000 people before the implementation of AB 32. If another 1,100,000 people are added to that total unemployment would reach 3,348,000 or 18.3%. In addition, there are both severe budget issues as well as water supply problems.

When fully implemented AB 32 is not going to stop climate change, though it may contribute to an amelioration of the increase in greenhouse gases. Even this modest reduction in CO2 emissions will not be met if the production of CO2 just moves out of state along with the economic activity that is producing the emissions. It is a fairly well known fact that greenhouse gas production is reduced in recessions, and I expect a wonderful report released from the EPA noting the recent reduction in greenhouse gas emissions. As the previous review of global warming research showed some research suggests that climate change may have some anthropogenic causes, but other research does not support that theory. Certainly, anthropogenic activity has contributed 4% of the 386 parts per million (0.039%) carbon dioxide in the atmosphere. If you recall, The "American Clean Energy and Security Act” is HR 2454, also know as the Waxman-Markley energy bill, or simply as "ACES" was passed by the House in June and models itself on the California plan. The bill includes a cap-and-trade global warming reduction plan designed to reduce carbon dioxide emissions in the U.S. No doubt Representative Waxman wishes to share the California economic experience of AB 32 with America and ensure we all reduce our greenhouse gas emissions, economic activity and discretionary spending all at the same time. Is this really how we want to spend the limited resource at our command?