Conflict Boils Over First “Allowance” Auction in California’s Cap-and-Trade Program

Ever since it first became law in 2006, California Assembly Bill 32, also known as the Global Warming Solutions bill, has been embroiled in controversy.

What the law set out to do, as it was originally written, is to craft a plan to achieve the maximum “technologically feasible and cost-effective reductions in greenhouse gas emissions from sources or categories of sources of greenhouse gases by 2020,” the bill’s language says, and to reduce California’s statewide level of greenhouse gas emissions to a level last achieved in 1990.

Compliance with all parts of AB32 are set to take effect in January, but major parts of the legislation are starting to take effect, and a big sticking point for proponents and opponents of the law is the issue of CCAs, or California carbon allowances.

Every company will be permitted to put a certain amount of CO2 emissions into the air, which is called an “allowance.” Companies will be able to buy 90 percent of these allowances from the state government, under the auspices of the California Air Resources Board (ARB).

For the first two years of the program, businesses will receive 90 percent of their allowance for free, with the free amount and the “cap” on emissions declining over time. The ARB estimates that businesses will pay $964 million in allowances in the fiscal year 2012-13.

Wait, what? If the allowances are free, where does the state expect to get $964 million from? Surely that can’t all come from former Gov. Schwarzenegger’s book royalties.

That nearly $1 billion is expected to be raised at four yearly “auctions” where the remaining 10 percent of emissions allowances will be sold, or, more accurately, auctioned off. At these auctions, companies can “bid” on a “lot” of allowances for use. At the first auction, on Nov. 14, allowances for the year 2015 were auctioned off; there will be no extra allowances needed for the first two years of the program.

Companies in California are also permitted to buy offsets for their carbon emissions. As the Associated Press noted, a company “can also meet up to 8 percent of its emissions reduction obligations by purchasing carbon offsets, or investments in forestry or other projects that reduce greenhouse gases.” Basically, the state will call it even if a company helps contribute to planting an “x” amount of trees for emitting a “y” amount of carbon.

The first of the quarterly auctions set off lawsuits and bickering among opponents of the auction process.

The California Chamber of Commerce filed a lawsuit in state court on Nov. 14 seeing to invalidate the auction, arguing that the Air Resources Board “exceeded the authority granted to it under AB32 in establishing the revenue-raising program.”

Proponents of the program, such as the Environmental Defense Fund and the ARB itself, say it will raise $1 billion from about 500 businesses in the state, and the program particularly will raise costs for carbon-emission-producing businesses.

Before we get into the merits of the Chamber of Commerce’s lawsuit and the auction’s actual pros and cons, a few facts:

  • The money raised from these auctions will mostly be given back to the state’s utility companies, which will then return dividends to the rate-payers, their customers.
  • A portion of the proceeds from the auctions will go toward the ARB’s implementation of AB32. At the Nov. 14 event, the ARB’s Stanley Young told me that $288 million was raised in allowances, and of that amount $233 million will go back to the utility companies, with the remaining “climate dividend” going to the state.

“We feel like the auction went smoothly and as effectively as it could have gone,” says Young, ARB’s communications director. “It was an important first step for us and for the stakeholders and sectors of the industry who are being effected. We’ve been working with them, and they see the auction as regulatory certainty. Responsible industries now need to consider the price of carbon.”

Not everyone sees the auction as a good thing. Loren Kaye, the President of the California Foundation for Commerce and Education (a think tank affiliated with the Chamber of Commerce) says he sees the auction as an overstepping of ARB’s authority, and an unfair tax on business.

“It doesn’t achieve any carbon reductions, and it merely raises money from the private sector to give to the government,” Kaye says. “The state was given no authority to conduct an auction, and no authority to raise any type of fee or tax greater than that what was needed to run the program.”

Kaye says the Chamber of Commerce lawsuit seeks to eliminate the auction process, and he feels that continuing to have the auctions “will make it extra expensive to do business here. You’re going to chase those jobs out of the state.”

Kaye adds he thought they had “a very good legal case,” while ARB’s Young says that he’s confident the auction “will withstand any lawsuit.”

Another vocal opponent of the auction is the Western States Petroleum Association. Vice President of Strategic Communications Tupper Hull says he and his organization (comprised of major oil manufacturers) support the goals of AB32, but that the auction is overreaching and unnecessary.

“We support the Chamber of Commerce lawsuit because this auction is an unlawful tax on energy-intensive businesses,” Hull says. “With the way the auction is structured, and the amount of allowances that were allocated to each sector, the refining sector has to purchase 10 percent of its baseline emissions right off the bat.”

“We believe AB32 has promise, and could still be what it was designed to be,” Hull adds, “but we’re a long way from that point.”

Hull and Kaye also brought up the point that every industry brings up when it wants to stop environmental regulation and emissions reductions, anywhere in the U.S.: Job losses. Hull pointed to a study by the Boston Consulting Group done last summer that says that AB32′s cap and trade provisions could  force the closure of up to half of the state’s 14 fuel refineries, leaving as many as 51,000 Californians out of work.

The study also identifies several impacts the regulations will have on the cost of making and supplying fuel to California consumers that could add as much as $2.50 to the cost of a gallon of gasoline as soon as 2015 if the regulations are not changed.

But that’s an argument made over and over again: That jobs and industries will vanish. What has actually happened in many cases, however, is that industries adjust and clean jobs come flowing into the state.

According to the studies cited by Emily Reyna of the Environmental Defense Fund’s California office, anticipation of California’s cap-and-trade program has helped attract more than $9 billion in clean tech investments since 2006.

Since 2006, jobs in the green economy have grown 10 times faster than total jobs, and the growth in green jobs is expected to accelerate once the program officially begins because it will encourage even more innovation in clean energy and energy efficiency products and services, and it will create new growth opportunities for companies that market them.

California already accounts for more cleantech investment than the rest of North America combined, and the EDF cites studies that show that AB32, along with investments in renewable energy and increased energy efficiency, are expected to create 700,000 jobs and $100 billion in new economic growth by 2020.

The next AB32 auction is scheduled for February 19.



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