Thought Piece

 Yikes, there were so many flaws in the first CA Carbon-Trading Program, I will refrain from even discussing the additional complexity being proposed in the new CA Senate Bill.

First, for my prejudices, I think that properly-done energy efficiency can play an oversized role solving electrical power generation problems while helping companies reduce their carbon footprint. In fact, I wrote a lengthy White Paper on the subject of energy efficiency and any carbon accounting in 2008 and a presentation to the World Renewable Congress in the same year, which I have provided links for both:

Anyway, here are some of the flaws in CA’s first Carbon-Trading Schemes:

  • Half of the auctions’ money went directly into state revenues, just like any other tax;
  • The other half went into the state high-speed rail program, affordable housing, transit and other pet political projects;
  • The C-T Program lacked proper authority after 2020;
  • The C-T Program had too many carve-outs;
  • It never included allowances for (accredited and properly measured/verified) energy efficiency, which is the quickest, cheapest and cleanest form of energy;
  • It was always too political;
  • It created whole new layers of uncertainty and risk (anybody remember the folly of the rolling blackouts of the early 2000’s);
  • It always had too much state micro-management attached it;
  • It punished the private sector, which continues to hollow out CA’s industrial base;
  • The C-T Program was always too globally ambitious for its own good;
  • It has hurt job creation in all markets, except the high technology sector;
  • The C-T Program like the California “deregulation efforts” of 1998, the whole program is gamable, much like it is in the European Union Emission Trading Scheme.

Ultimately, all “cap and trade schemes,” including the new CA Senate changes to the C-T Program, have turned out to be counter-productive to economic development and long-tern environmental mitigation.

P.S. Aren’t you glad that I didn’t discuss the particulars of the European Union’s Cap and Trade or the nuances of the new CA bill?


CA Senate leader proposes big changes to carbon-pricing program: shaky carbon trading auctions have cut into “expected state revenues.”

SACRAMENTO, Calif. — Top California lawmakers moved yesterday to overhaul the state’s cap-and-trade system to send revenue back to residents as a “climate dividend.”

State Sen. Bob Wieckowski (D) introduced the legislation, which would launch a new carbon-trading program in 2021. It includes new restrictions on allowance prices as well as on businesses that must turn in the credits to meet state emissions targets in 2020 and 2030.

The plan is aimed at resuscitating shaky auctions that have cut into expected state revenues, as well as smoothing the possibility of sharp price fluctuations in future years. It could also be meshed with other recent legislative proposals to adjust the market to respond to the concerns of environmental justice groups, which say poor and non-Caucasian communities should benefit more from carbon trading.

The bill has the support of California Senate President Pro Tempore Kevin de León (D), who has been concerned about low demand for allowances as well as about the state’s poorer populations who live near industrial emissions sources.

“Our current program is overly complex. It’s mired in legal challenges,” he said. “You’re witnessing the legislative branch starting to exert more authority.”

State lawmakers are in a prime position to adjust the cap-and-trade program this year, due to the possibility that the state may lack the authority to continue it past 2020. Gov. Jerry Brown (D) has called for the Legislature to reapprove cap and trade with a two-thirds vote, to insulate it against legal challenges that it violates a state constitutional amendment requiring a supermajority approval of new taxes and fees.

Wieckowski’s bill would significantly change the program. Under the proposal, the state Air Resources Board (ARB) would continue holding quarterly auctions of carbon allowances, but the revenue would largely be returned to residents, rather than go to a fund that has become an important part of budget negotiations. The money currently must be used to further reduce greenhouse gases and has given billions to the state’s high-speed rail project, affordable housing, transit and other programs. The new proposal would allocate the money to three uses: household dividends, infrastructure spending, and climate and clean energy research.

The new bill would also create a “price collar” that would keep prices from fluctuating more than $60 per ton between the lowest and highest levels. But in order to keep the price steady, the number of allowances would be permitted to increase indefinitely, abandoning the hard cap on allowance supply in the current program that allows it to function as a “backstop” to ensure the overall 2020 emissions target is met.

“It’s not a backstop anymore,” Wieckowski said.

‘A clean cut’ by 2021

The market has been suffering from an oversupply of carbon credits, in part due to the lingering legal uncertainties as well as to a generous cap that was set before the recession hit. Credits have been hovering around the current $14-per-ton price floor, but prices are expected to rise significantly in the coming years, as the cap declines to 40 percent below 1990 emissions levels by 2030.

Under the bill, allowance prices would start at $20 per metric ton in 2021 and rise $5 per year plus inflation starting in 2023. The initial ceiling would be $30 per ton and would rise $10 per year. But it would be an entirely new market, with no carryover from the pre-2021 program.

For those who were hoping to use existing credits to meet their obligations after 2020, “I guess we changed your plan,” Wieckowski said. “There’s going to be a clean cut on Dec. 31, 2020.”

Initial reactions were favorable among environmental justice groups but not among mainstream environmentalists, who called it a “complete overhaul” that could threaten the state’s image as a leader on climate policy by jeopardizing the integrity of its cap, as well as its ability to link with other jurisdictions.

“Setting a hard ceiling on allowance prices, without any provision to ensure that California would meet its climate targets if that price ceiling were exceeded, opens a loophole that could undermine the program’s environmental integrity and California’s climate leadership,” said Erica Morehouse, a senior attorney with the Environmental Defense Fund. She also objected to a provision that would end existing linkages to other programs in 2020 and reconsider them in the new iteration. “International linkages strengthen California’s leadership position and allow the state to leverage its program to spur greater ambition globally. Turning inward now would cede global leadership just when the world needs it most.”

An environmental justice advocate defended the bill. “It’s not throwing it away; it’s taking it to the next level,” said Parin Shah, senior strategist with the Asian Pacific Environmental Network. “It’s just cleaning the baby’s bathwater.”

Industry groups were neutral. “This bill is the latest among a number of proposals on cap and trade we are studying,” said Cathy Reheis-Boyd, president of the Western States Petroleum Association, which represents BP, Chevron, Shell and other major oil refiners. “We believe a well-designed cap-and-trade program is critical to meeting California’s 2030 greenhouse gas emissions goals.”

One market consultant who advises businesses on their compliance plans said the bill would render allowances less valuable by eliminating “banking” provisions that allow companies to carry them over from year to year.

“These things are basically like little time bombs,” said Andre Templeman, a principal with the firm Alpha Inception.

A balancing act?

Allowance prices in secondary trading fell about 10 cents yesterday on the bill’s introduction, according to Dan McGraw, a senior market strategist with ICIS U.S. Carbon Markets. “[The] market didn’t take a super-bearish view because it’s still a long way out and may not come to fruition,” he said.

But if the bill passes, analysts expect it would further dampen demand — and revenues — in the pre-2020 market. “The approach proposed in S.B. 775 would certainly reduce demand at auctions in 2020 and sooner,” said Chris Busch of the advisory firm Energy Innovations. But he praised the bill’s efforts to manage potential price spikes as the cap ratchets down.

“I think it is a pretty brilliant balancing of EJ [environmental justice] and business concerns,” he said.

S.B. 775 creates a potential headache for state regulators, who are planning to vote next month on a “scoping plan” that envisions extending the existing cap and trade program through 2030. That would set up a clash between the agency and lawmakers who say ARB needs to wait for permission to move forward on a post-2020 market.

“We don’t think they have the statutory authority to do that,” said de León’s chief of staff, Dan Reeves. ARB officials declined to comment on the bill.

Several other bills have been introduced this session to extend the state’s carbon market through 2030. The author of a proposal backed by environmental justice supporters that would withhold allowances from businesses that violate standards for conventional air pollutants said she would insist on continuing to draw that connection.

“As bills advance through the Legislature, I will be firm on my commitment to a cap-and-trade program that benefits all Californians, where compliance flexibility does not come at the expense of local air quality,” said Assemblymember Cristina Garcia (D).

A Republican lawmaker who has been involved in discussions on the Assembly side signaled that it would face an uphill battle to get supermajority approval, as Brown achieved last month for an infrastructure funding package. “Cap and trade cannot serve as a honeypot, collecting revenue for pet projects,” said Assemblymember Rocky Chávez (R). “Their scheme would hit Californians with a guaranteed 60-cents-per-gallon hike in gas prices — days after passing the largest gas tax increase in state history.”