Cap-and-Trade is Still Alive (In California)

As “Cap-and-Trade Is Dead” continues to echo through the empty halls of Congress, California rolled out its proposed greenhouse gas (GHG) cap-and-trade program on Friday. The proposed regulations send a powerful message that, notwithstanding political paralysis at the federal level, the states are proceeding with meaningful climate action.

The proposed cap-and-trade program, to be voted on by the California Air Resources Board (CARB) at its December 2010 meeting, is scheduled to take effect in January 2012. At the outset, it will apply to the state’s large stationary sources, including manufacturing and utilities. Beginning in 2015, the program will also cover fuel distributors, including distributors of transportation fuels and natural gas or propane not covered by the program’s earlier phase.

The cap-and-trade program is just one of many emissions reduction strategies outlined in California’s scoping plan, the planning document that guides the state’s implementation of AB 32, its primary climate law. (Other strategies include vehicle emissions standards, a renewable portfolio standard, building and appliance efficiency standards, an electricity performance standard for utilities, and a host of other measures.) The cap-and-trade program nonetheless has far-reaching significance because it sets an actual cap on 85% of the state’s emissions. Although the state’s many climate strategies are all designed to reduce emissions, their actual results are uncertain, and the cap will help the state meet its specific target. 

The trading program has been a lightning rod for controversy because it is the primary mechanism for controlling the state’s industrial sources. A key feature, from industry’s perspective, is how the state will allocate carbon allowances. Although the state’s Economic Allocation and Advisory Committee had recommended that the state auction most allowances, rather than allocate them to covered entities for free, CARB has proposed to begin the program by freely allocating most allowances, moving to increased auctioning over time. The proposal is thus similar to recent Congressional proposals. It differs from the approach taken in the northeastern states’ Regional Greenhouse Gas Initiative, in which most participating states chose to auction allowances to the utilities in that program. In light of California’s faltering economic conditions, the political controversy surrounding cap-and-trade programs, and industries’ heated opposition to auctions, the result is not surprising. That said, the choice to freely allocate so many allowances is, no doubt, disappointing to environmentalists who had hoped to place a clearer price on pollution.

A key issue, from an environmental justice perspective, has been how the proposal would address AB 32’s environmental justice requirements. AB 32 states that, if CARB develops a trading program, it cannot result in disproportionate impacts on vulnerable communities. Such impacts could occur if facilities purchased greenhouse gas allowances and, as a result, incidentally increased their co-pollutant emissions, intensifying existing hot spots. AB 32 also states that the GHG regulations should, if possible, be designed to help the state achieve its air quality goals – presumably by encouraging GHG reductions, and associated co-pollutant reductions, in the state’s most polluted areas.  Rather than including any direct measures to avoid emissions increases and encourage reductions in polluted areas, CARB opines that the program will, overall, reduce co-pollutants. The agency indicates that it will carefully monitor the results and that it is “committed to promptly developing and implementing appropriate responses” if the trading program does lead to increases in co-pollutant emissions. Although CARB’s approach does not guarantee that the program will not lead to increases, its intention to monitor provides more attention to co-pollutant consequences than the average GHG cap-and-trade program.

The cap-and-trade proposal was released days before the November 2^nd election, when California voters will decide Proposition 23, an initiative that would suspend AB 32 until unemployment levels are substantially lower. The proposal reveals that some of the Prop 23 proponents’ contentions about the program’s costs were misplaced. For example, Prop 23 proponents had calculated the program’s impact on the assumption that allowances would be auctioned and that allowance prices would be substantially higher than CARB now projects. The proposal allows for a clearer assessment of the likely impact of AB 32 on California and the merits (if any) of suspending the law. In any case, Prop 23 appears headed to defeat, and is unlikely to pose an obstacle to California’s implementation of its cap-and-trade program.

Assuming Prop 23 is defeated and California’s program moves forward as planned, the state will have the chance to give a dreaded cap-and-trade program – and many other innovative initiatives as well – a trial run. Ideally, that experience will demonstrate to other states and Congress that comprehensive, well-designed climate programs can help create a more sustainable infrastructure – without the doomsday economic consequences projected by the climate nay-sayers.