California Readies for Cap-and-Trade Next Steps

In November 2012, California launched its cap-and-trade program, the second largest in the world after the European Union’s. The state’s largest carbon producers -- businesses that emit over 25,000 metric tons of emissions annually -- buy carbon allowances from the California Air Resources Board's (CARB) quarterly auctions. Depending on who you ask, California’s carbon market is either a success or a drag on the state’s economy. The Environmental Defense Fund, for example, has touted California’s cap-and-trade as a global model for reducing emissions while creating new business opportunities. The Western States Petroleum Association (WSPA), on the other hand, regularly criticizes the program for what it says drives up the costs of business and could wreak havoc within the fuel markets.

The way California’s cap-and-trade program works is relatively simple. Large polluters, such as utilities, buy certificates for each ton of carbon they produce. Polluters who are successful in reducing their emissions can sell their allowances to other companies who are unable to do so, in sum creating a market-based price for carbon. The allowances will slowly decline in numbers over the years, so think of cap-and-trade as a form of musical chairs, with companies bidding on fewer certificates over time — motivating them to find ways to reduce their greenhouse gas emissions.

One of the first successful cap-and-trade programs was launched during the George H.W. Bush administration in 1990. Under the 1990 Clean Air Act, major polluters who were responsible for “acid rain” traded certificates in a move to reduce the emissions of such pollutants as sulphur dioxide. A generation later, California’s cap-and-trade program continues to grow: For example, the state has linked with Quebec’s cap-and-trade program, allowing the two to trade each other's carbon allowances. And as of January 2015, petroleum refineries will also be required to participate within California’s cap-and-trade system. The energy companies are clearly unhappy about it, sharing scenarios of the state’s economy headed for a “fuels cliff.” But will California, the economy of which has been oft-described as careening over a cliff, really experience a disruption to its slowly recovering economy?

Fears of California sinking under the weight of a cap-and-trade program appear to be premature. The WSPA, for example, often cites a report issued by the Boston Consulting Group (BCG) on AB 32, the legislative act that launched a bevy of environmental programs including California’s cap-and-trade program. The report estimated the cost of gas would rise 14 to 69 cents a gallon due to cap-and-trade, and also predicted volatility in the energy markets that could lead to electricity price volatility similar to what roiled throughout California in 2000. BCG also suggested a new wave of price volatility, from rapid price fluctuations on future carbon markets. Coupled with the state’s low-carbon fuel standard, the BCS report suggested as many as four to six refineries could close in California by the end of this decade.

But a University of California, Davis report written last year, of which the WSPA was a sponsor, has shown such fears are overblown. Part of BCG’s scenario assumes expensive sugarcane ethanol from Brazil would be the primary biofuel available to refineries to allow them to be compliant with California’s air pollution laws. But the UC Davis study points out that several alternatives to sugarcane ethanol are on the market. Furthermore, the scenarios of refineries closing for good depend on a variety of factors: The continued demand for gasoline in California isn't going away any time soon, and closing a refinery is a long, expensive process. It is doubtful energy companies will be quick to pull the plug.

Many organizations, taking a more holistic view, are making the case that cap-and-trade, along with the other programs under the umbrella of AB 32, are making a positive impact on the economy. The Environmental Defense Fund, for example, cites potential savings of $21 billion for the state by 2025 due to reduced health care expenses, a reduction in work days lost and a boost in energy security — and the cap-and-trade program, by creating a market for investment in energy efficiency programs and less carbon-intensive fuels, could account for 20 percent of the pollution cuts should all of AB 32’s programs continue as planned. And with transportation creating more pollution in California than utilities (in most states the reverse is true), the oil companies and their refineries have to be a part of this process.

Consumers are already seeing a difference. Walter Wang, an adviser with ZSA and Adjunct Professor at the University of San Diego School of Law, pointed out that many utility ratepayers have seen a "climate credit" on their bills this year. “There is real value in these programs going forward,” Wang said, “and while ‘energy efficiency’ isn't sexy, there is immediate value and a short payback period.”

The Union of Concerned Scientists (UCS) also points out auction revenues from cap-and-trade can benefit the public good by providing revenues for investment in clean energy technologies and job training programs for workers disrupted by new programs; for now the plan in California is to fund the high-speed rail, fund other public transport programs, contribute to home weatherization projects for low-income families and offer new automobile buyers lower emission vehicle rebates.

And speaking of automobiles, during an interview I had with Adrienne Alvord, California and Western States Director at UCS, she explained that looking at only prices at the pump does not give the full story. “Our gasoline prices are higher per pump, but people are spending less on gasoline,” Alvord said. Despite California’s reputation as the land of the car, California ranks 15th from the bottom in gasoline consumption per capita; and despite prices higher than most of the country, per capita spending on gasoline is 13th lowest in the Golden State. As a result of cap-and-trade and other energy efficiency programs in California, a driver who buys a new vehicle now can expect to save $3,000 if he or she drives the vehicle over 15 years.

Consumers across all income levels are seeing the results, insisted Alvord. “We’re taking the revenue that we are raising from these auctions, and we’re using it to lower emissions,” she continued, “and 10 percent of those revenues from the cap-and-trade auctions are being directly invested in low income communities. We’re not just cleaning up the air, but are investing in those who can benefit the most, as in home weatherization programs that directly benefit those who live in some of the most polluted areas of the state.”

Taking a long-term approach is important if California’s cap-and-trade program will succeed. “We have no control over oil prices now,” said Alvord. “We can drill domestically for oil all we want, but it is still a worldwide commodity subject to global pressures. To the extent we can provide ourselves with different forms of energy and make vehicles more fuel efficient, and the more we are able to plan our transport system in a way to reduce our dependence, then we are less vulnerable to our problems.”

If we are ever going to stabilize the price of oil and prevent the shocks that have often roiled our economy over the years, the best way is to reduce our dependence on it. Requiring that oil companies pay for the pollution they create within a cap-and-trade system, and using those monies to diversify our energy portfolio, is a way forward — and another reason why the U.S., and much of the world, looks to California for new ideas.

Image credit: Wikipedia (Downtowngal)