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.