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A panel advising California regulatory authorities on how to harness the power of the market to achieve ambitious new greenhouse gas reduction goals agreed to consider only a state-based carbon cap-and-trade program. It dismissed options such as a carbon tax or allowing offsets from emissions reductions in other states or nations. The decision drew criticism from both business and environmental representatives February 27. Dominic Di Mare, California Chamber of Commerce lobbyist, urged the panel this week to consider investment incentives for new technologies that reduce carbon emissions. He also asked that it allow California companies to purchase carbon offsets from a wide range of sources, including in developing countries. Agreeing that the advisory committee should weigh a range of market options, Bill McGavern, Sierra Club lobbyist, said they should include subsidies to slash carbon emissions. He said the state should commit something along the lines of the $2 billion provided in the Million Solar Roofs program aimed at creating 3,000 MW of new solar power. The disagreement came at the first meeting of the Market Advisory Committee, which the California Environmental Protection Agency appointed to advise the California Air Resources Board. The panel is charged with providing advice on how to infuse market principles into greenhouse gas emissions reduction programs set up under AB 32. That law requires California to reduce greenhouse gas emissions, but it does not specify how - that's up to agencies such as the air board. Committee vice-chair Larry Goulder, a Stanford University economist, said that a key goal of the panel should be to evaluate how much of AB 32's mandated reductions can be achieved through a carbon cap-and-trade program. The law mandates a 25 percent cut by 2020. Addressing the same issue before the Western Power Trading Forum February 23, Nancy Ryan, adviser to California Public Utilities Commission president Mike Peevey, said state regulators envision a hybrid regulatory system for state utilities under the climate change law. Regulators "must do everything to find the right balance," she said. That means that utilities can expect to face both a load-based carbon cap and further direct regulations to step up reliance on renewable resources, energy efficiency, and demand-response programs to achieve greenhouse gas reductions. Meanwhile, a key power industry executive at the trade group's meeting questioned how well a California carbon-trading market under a load-based cap would work if it was narrowly construed (see story on page 10). The state's advisory committee will not have much time to decide. Created by executive order after the governor signed AB 32, it is working under a June 30 deadline for its recommendations to the Air Resources Board on greenhouse gas curbs. Key concerns about a cap-and-trade program include the need for a "safety valve" to protect affected businesses against potential carbon credit price spikes and how to avoid disparate impacts on low-income, predominantly minority communities. Those potentially could include increases in harmful pollutants that might result from reducing greenhouse gas emissions. "There will be no softening of other state laws to improve air quality, enhance water quality, or prevent local pollution," Goulder said. "We want to avoid disparate impacts on the disadvantaged." Carbon dioxide and other greenhouse gas emissions create problems on a global scale, while other pollutants, such as nitrogen oxides, create localized areas of pollution, which when concentrated are known as "hot spots." Other issues the committee faces include how to prevent actions that will undermine mandated carbon curbs. These include thwarting potential overuse of carbon offsets in lieu of actual emissions reductions in California and keeping businesses from leaving the state to avoid mandatory reductions in emissions from their facilities. "We don't want offsets to undermine the current goal, and want to get the electricity sector on a different emissions trajectory," said committee member Dale Bryk, Natural Resources Defense Council attorney. If a polluting utility is allowed to buy its way out of emissions reductions, there will be little net improvement, said Bryk, who has worked on the multistate Regional Greenhouse Gas Initiative (RGGI) process in the Northeast. Given top billing by the committee and many stakeholders was creating a cap-and-trade program that fits into other carbon-trading schemes in the U.S. and/or Europe. This week, the governors of California, Arizona, Oregon, Washington, and New Mexico agreed to a market-based greenhouse gas reduction plan that could include a load-based cap and a trading program. The state chiefs agreed to develop a joint plan in the next 18 months. The Northeastern region's budding RGGI efforts to cap emissions from the electricity sector include an allowance auction, which, according to Bryk, "seems counterintuitive." She noted that as with fuel costs, businesses would charge their customers the cost of carbon allowances, whether or not they actually paid for them. California's Market Advisory Committee members appear to be leaning toward auctioning carbon allowances, instead of giving them away to utilities, oil refineries, and other large stationary-source emitters of carbon. After setting a carbon cap on the different entities, the air board would sell carbon credits annually, and then utilities and other firms could trade them. The resulting revenue could yield the state a minimum of $2 billion a year and be directed into energy efficiency and clean technology research and development. "Auctioned permits achieve emissions reductions with the lowest social costs and the greatest social benefit," said Andrew Horner, Redefining Progress director. After their public meeting, members of the Market Advisory Committee continued to discuss whether carbon emissions allowances should be auctioned by the state or given away. Catherine Witherspoon, the air board's executive officer, told the agency's economics and technology committee meeting March 1 that some members felt that it was a political decision and one that should not be taken by the Market Advisory Committee. Others favored an auction that would bring the state money to fund development of greenhouse gas-reducing technologies. Witherspoon said that the market advisory panel will discuss the issue in a series of telephone conference calls that will be closed to the public. The Market Advisory Committee meetings are not subject to the state's open-meetings law, the Brown Act. Meanwhile, Witherspoon told the economics and technology committee that it might want to recommend that the market advisory panel auction the credits, pointing out that revenue from the credits would create a stream of money that the state could use to foster low-carbon technologies.

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