Air Resources Board Approves Cap-and-Trade Plan

The California Air Resources Board voted 9 - 1 last Thursday to approve their cap-and-trade regulation, chalking up a significant milestone toward reducing California’s greenhouse gas emissions under its AB 32 law. The regulation is a key measure to achieve the greenhouse gas reduction goals of AB 32, California’s Global Warming Solutions Act signed by Governor Schwarzenegger in 2006. Schwarzenegger himself made a surprise appearance before the board to plead for approval. "I want to show California that we can protect both the economy and the environment. And of course it’s a challenge to do that, there’s no two ways about that, but where there’s a will, there’s a way," he said. He is sensitive to the recession, he said, but argued that many of the new jobs being created under the system are in the clean technology industry. "The real jobs we're creating right now are green jobs. Since 2006 or so green jobs have been created 10 times faster than in any other sector, so it's also an economic plus," he said. But he also said reducing greenhouse gas pollution is not just about climate change, but about human health and national security. "I despise the fact that we send $1 billion a year to foreign places for our oil and to places that hate us. We send this money to people that hate us and that are organizing terrorists and trying to blow up our country," he said. Supporters agree with the Governor that the system will help spur economic recovery and innovation, pushing business to invest in clean technologies. “This program is the capstone of our climate policy, and will accelerate California’s progress toward a clean energy economy,” said ARB Chairman Mary D. Nichols. “It rewards efficiency and provides companies with the greatest flexibility to find innovative solutions that drive green jobs, clean our environment, increase our energy security and ensure that California stands ready to compete in the booming global market for clean and renewable energy.” The lone dissenting board member, Fresno cardiologist Dr. John Telles, said he had concerns that the new market created by the regulation was too vulnerable to cheating. "We're potentially vulnerable here to be manipulated," he said. "And I don't see enough safeguards in the design of the market." He also expressed concern about how future cap-and-trade program revenue would be spent. "This is a regressive tax on the economically disadvantaged people in the community," he said. The board's staff said it would be working on market issues in the coming year before the launch of the program, but recognized that they were creating something that had not been tried before. The regulation sets a statewide limit on the emissions from sources responsible for 80 percent of California’s greenhouse gas emissions and establishes a price signal needed to drive long-term investment in cleaner fuels and more efficient use of energy. The program is designed to provide emission sources covered by the rules the flexibility to seek out and implement the lowest-cost options to reduce emissions. The cap-and-trade program also works in concert with other measures, says the ARB, such as standards for cleaner vehicles, low-carbon fuels, renewable electricity and energy efficiency, and complements and supports California’s existing efforts to reduce smog-forming and toxic air pollutants. “The cap-and-trade program provides California with the opportunity to fill the growing global demand for the projects, patents and products needed to move away from fossil fuels and to cleaner energy sources,” added Nichols. The regulation will cover 360 businesses representing 600 facilities and is divided into two broad phases: an initial phase beginning in 2012 that will include all major industrial sources along with utilities; and, a second phase that starts in 2015 and brings in distributors of transportation fuels, natural gas and other fuels. Companies are not given a specific limit on their greenhouse gas emissions but must supply a sufficient number of allowances (each covering the equivalent of one ton of carbon dioxide) to cover their annual emissions. Each year, the total number of allowances issued in the state drops, requiring companies to find the most cost-effective and efficient approaches to reducing their emissions. By the end of the program in 2020 there will be a 15 percent reduction in greenhouse gas emissions compared to today, reaching the same level of emissions as the state experienced in 1990, as required under AB 32. In order to provide a gradual transition, ARB will provide significant free allowances to all industrial sources during the initial three-year period (2012-2014), then phase them out for most industries. Companies that need additional allowances to cover their emissions can purchase them at regular quarterly auctions ARB will conduct, or buy them on the market. Cement makers and oil companies, considered prone to moving operations out of the state, would be granted free allowances for eight years. That grace period angered some environmentalists. "Cap-and-trade was always meant to be the industry-friendly way to reduce emissions," said Bill Magavern, the Sierra Club's California director. "But the oil industry is posting big profits and does not need assistance from the state." Electric utilities will also be given allowances and they will be required to sell those allowances and dedicate the revenue generated for the benefit of their ratepayers and to help achieve AB 32 goals. Up to eight percent of a company’s emissions can be covered using credits from compliance-grade "offset" projects, promoting the development of beneficial environmental projects in the forestry and agriculture sectors. Included in the board-approved regulation are four protocols, or systems of rules, covering carbon accounting rules for offset credits in forestry management, urban forestry (planting trees in urban areas), dairy methane digesters, and the destruction of existing banks of ozone-depleting substances in the U.S. (mostly in the form of refrigerants in older refrigeration and air-conditioning equipment). There are also provisions to develop international offset programs that could include the preservation of international forests. A Memorandum of Understanding has already been signed with Chiapas, Mexico, and Acre, Brazil, at the Governor’s Global Climate Summit 3 to establish these offset programs. The regulation is designed so that California may link up with programs in other states or provinces within the Western Climate Initiative, including New Mexico, British Columbia, Ontario and Quebec. Efforts are also underway to link the WCI with other regional climate programs, such as the Midwest Greenhouse Gas Reduction Accord and the Regional Greenhouse Gas Initiative which covers the power generation emissions of 10 northeastern states. The regulation has been in development for the past two years since the passage of the Scoping Plan in 2008. ARB staff held 40 public workshops on every aspect of the cap-and-trade program design, and hundreds of meetings with stakeholders. ARB staff also benefited from the analysis of a blue ribbon committee of economic advisers, consultation with world-renowned institutions that specialize in climate issues, and advice from experts with experience from other cap-and-trade programs elsewhere in the world. The Air Resources Board worked closely with oil companies and other major emitters to develop the standards. At the meeting yesterday, a Chevron representative called the four years of negotiations "an excellent experience." "The board has done a great job in developing most of the cap-and-trade program," the representative said. "It has been a marathon." In the most controversial part of the decision, the board ignored the advice of its panel of prominent economists it had convened earlier this year, which advised auctioning most of the greenhouse gas allowances from the start, rather than giving them out for free. The state could use the proceeds from selling allowances to offer consumers incentives to invest in energy efficiency, and to combat the effects of industrial pollution in poor neighborhoods. The Economic and Allocation Advisory Committee had recommended collecting the funds and distributing 75% back to citizens directly. Last week Next 10 , an independent, non-profit, non-partisan organization founded by venture capitalist and philanthropist F. Noel Perry, released five economic and research based studies from leading experts on California's planned cap-and-trade program, along with a report that summarizes this body of research, " California’s Greenhouse Gas Emissions Trading Program: The multi-billion dollar question." Next 10 commissioned a set of five research papers from leading academic experts to examine the following questions: - What are the economic impacts of the distribution of tradable emission permits (allowances), whether by auction or distribution without charge? - If auctioned, what are the economic impacts of various distribution approaches for the resulting revenue? “How California designs its emissions trading program is a multibillion dollar question. Next 10 wanted to provide greater insight into the impacts of various design choices on California jobs, energy prices and household income, as well as voter support. What we found is that an emissions trading program will have a negligible impact on California households and businesses, and that there is strong voter support for such a program,” said Perry. To better understand the viewpoints of Californians on these issues, Next 10 also commissioned the Field Research Corporation to survey registered voters' opinions on key questions related to the cap-and-trade program. The work was completed in November. Top findings include: -66 percent of California voters favor strongly (44 percent) or somewhat (22 percent) the 2006 law to reduce emissions of greenhouse gases, up from 58 percent who backed the law when Field Research last polled on this topic in March. -64 percent of California voters favor strongly (34 percent) or somewhat (30 percent) creating an emissions trading program wherein businesses would be required to obtain tradable permits to continue emitting greenhouse gas emissions. -Just over half of California voters (52 percent) favor distributing these permits for free rather than requiring businesses to purchase them (35 percent). -If the state did require businesses to purchase the permits, 54 percent of California voters would favor using the resulting revenue to reduce cuts to state services, as opposed to returning the money to residents (39 percent). -73 percent of California voters agree strongly or somewhat that California can reduce greenhouse gases that contribute to global warming and expand jobs and economic prosperity at the same time. This is up from 69 percent who agreed with this statement in March. Perry said the poll results reflect Californians' belief that the fight against global warming represents a business opportunity for the state, home to many companies specializing in renewable power and alternative fuels. "It's uniquely Californian," Perry said. "These are not the same results you'd see elsewhere in the country." "Ironically, the increased attention generated by Proposition 23, which sought to suspend AB 32 and was defeated by voters at the polls in November by a 62% to 38% margin, has had the effect of strengthening support for the law" said Mark DiCamillo, Senior Vice President of Field Research Corporation. Another controversial aspect of the plan is the "offset" provision, that allows companies to offset up to 49% of the emissions they are required to cut by investing in reductions elsewhere. Last week, a coalition of 47 conservation groups led by the Center for Biological Diversity and the Sierra Club called on the board to exclude forest projects that employ clear-cutting from the offset program. "We should not try to clear-cut our way out of climate change," they wrote. The plan, they added, "explicitly invites forest clear-cutting as a carbon offset project and incentivizes the conversion of natural forests into tree farms." The Nature Conservancy, however, and several other environmental groups endorsed the forest protocol, saying that landowners would have to demonstrate to independent auditors that they are managing their forests to store more carbon, and therefore avoiding some of the greenhouse gas emissions that come from timber harvesting. California timber firms stand to earn millions of dollars through the sale of carbon credits. One of the most controversial provisions of the forest protocol would enable timber companies to obtain credits by replanting trees in clear-cut areas of the forest. The protocol also makes California the first place in the world to assign carbon credits to wood products created from the trees themselves. For those credits, the state relies on a U.S. Department of Energy registry that estimates the carbon in everything from wooden chairs and bed frames to two-by-fours made from fir, pine, cedar and hemlock trees harvested in California. Timber companies would be free to sell its pool of credits to utility companies, refineries and major industrial enterprises which need them to meet their emission limits. David Bischel, president of the California Forestry Association , representing timber harvesters and processors, says that the new Forest Protocol “helps to monetize an important environmental benefit by encouraging more standing timber in the forests, and more wood products used by society.” Early drafts of the protocol did not permit clear-cutting, according to Jeff Shellito, an environmental consultant and former aide to retired state Sen. Byron Sher. But in 2007, the timber industry began lobbying to alter the protocol in their favor. In 2002, Sher had authored legislation that established forest preservation standards for California's then-voluntary carbon market. “We went to great pains (in 2002) to ensure you couldn’t get carbon credits from clear cutting,” Shellito said. The biggest timber company and landowner in California, Sierra Pacific Industries – with some 1.9 million acres across the state – was the most aggressive individual timber company lobbying on the regulations. Over the course of 2007 and 2008, Sierra Pacific paid $37,500 to California Strategies , a major Sacramento lobbying firm, to present its case. The company also nurtured a relationship with Gov. Arnold Schwarzenegger. Sierra Pacific has donated $29,600 to the governor’s campaign committees, and its billionaire owner, Archie Aldis "Red" Emmerson, hosted a $250-a-plate fundraising lunch for the governor's reelection campaign at his estate outside of Redding. Emmerson is listed by Forbes as one of the world’s 500 wealthiest people. Altogether, according to campaign contribution records filed with the secretary of state, the company has donated about $890,000 to political candidates and ballot measures in California in the past five years. The California Forestry Association, a frequent donor to political causes and candidates, also reported spending $245,000 lobbying state agencies on a variety of issues in 2007 and 2008, including climate legislation and the Air Resources Board policy on greenhouse gas emissions. In September 2007, Sierra Pacific sent a six-page letter to the Air Resources Board outlining the changes it would like to see in the protocols – most of which the board accepted. Among the company’s requests was a plan to qualify what it calls “even-age management” of its forests for carbon credits. Even-age refers to trees that are planted at the same time for future cutting. “In our view,” wrote the company, “there is no valid reason for requiring multiple ages of mixed species on every acre. Indeed, natural forests before the intervention of humans often consisted of large tracts of even-age stands which were generated from fires. Today’s management often mimics this type of forest through the practice of even-age forestry.” Under this definition, a significant portion of Sierra Pacific’s land could be credited over the next century. The company would have to verify its claims of how much new carbon is being stored in its replanted trees – which it would be entitled to cut again in 50- to 80-year cycles. Sierra Pacific nurseries are busy breeding new varieties of native trees to heighten the quantity of carbon in their trunks, leaves and roots. Critics, like former legislator Sher, say that the new protocol violates some of the basic principles of forest conservation. What the timber industry calls “even-age management” Sher calls “tree plantations.” “The forest companies are interested in being able to harvest their trees, and replant, and then produce a new asset that they can sell,” Sher said. “It undermines the biodiversity of the forest. You end up with tree plantations that are much more vulnerable to fire and disease." “The protocol subsidizes the current business as usual: aggressive timber management,” said Brian Nowicki, a policy analyst with the Center for Biological Diversity, a group that has sued the state over Sierra Pacific’s logging practices. Nowicki questioned whether the rules encourage companies to do anymore than they’re doing already. Other environmental groups, like The Nature Conservancy and Environmental Defense Fund, support the idea of creating financial incentives to keep trees with more carbon standing and rewarding landowners for agreeing not to convert forests into commercial developments for at least one hundred years, which is another provision of the protocol. “Landowners will have to go above and beyond their current practices,” comments Michelle Passero, a senior climate policy adviser to The Nature Conservancy California. “And that should lead to more protection and better management of our forests.” The nonprofit Climate Action Reserve , which was created to establish standards for the verification of greenhouse gas emissions and reductions, is the primary author of the new rules. Gary Gero, president of the Climate Action Registry, said he was given a narrow goal: to fight climate change by increasing the quantity of carbon dioxide in trees and wood. “The primary purpose of the protocol,” he said, “is to ensure that the total amount of sequestered carbon increases over the next hundred years." The registry, he said, refused one of Sierra Pacific’s additional requests – that it grant carbon credits for wood discarded in landfills. The tension between preserving forests and preserving trees for their carbon lies at the heart of the controversy. The state’s climate legislation calls for the air board to "design emissions reduction measures … in a manner that minimizes costs and maximizes benefits for California’s economy.” Carbon in trees are the cheapest of various options that would create an abundant supply of offsets, making all credits relatively inexpensive. Chairman Nichols elaborated: "Offsets are a very important tool in assuring regulated industries and the public that the costs of a cap-and-trade program can be managed within reasonable bounds. If you didn't have high quality offsets that can be used for compliance purposes, you could see situations where a company might be unable to grow or expand in California or to meet its limits without having a huge run-up in prices of the allowances. The offsets serve as a way to keep the prices of the allowances within a reasonable boundary. Offsets also provide a way for businesses that aren't under any compliance obligations to participate in the cap-and-trade program, make money and help reduce overall emissions. For example, offsets created by better management of dairies provide multiple benefits: they help with manure management, they provide the dairy farmer with revenue, and they produce another energy source. It is really a win-win proposition." Mary Nichols said that California “already has the strictest timber standards in the nation, and we will leverage those standards onto other states which hope to participate in the California forest protocol.” Those standards limit clear cuts to 20 acres and require replanting areas of cut trees. She said that states like Washington and Oregon, which permit clear cuts of as much as ten times that, would have to abide by this state’s limitations if its landowners are to gain credits to sell to California industries. The same applies to forests in Brazil and Chiapas, Mexico, which are likely to be the first foreign participants in the California program. “The advocacy groups in the forest area,” she said, “tend to value forests primarily for their ecosystem value, whereas the industry is looking at carbon as elements of value on the land.” She says that the state board is considering additional provisions to “make it absolutely clear that we are not going to provide any incentives for even-aged management.” The measures, she said, would be aimed at ensuring that “no projects [would be] registered as offsets that had been done using any amount of clear cutting at all.” Adopting those rules, Nichols said, could take as long as two years.

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