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The California Public Utilities Commission's greenhouse gas emissions cap on utility electricity supplies was criticized as a go-it-alone strategy that could fail to tackle emission "leakage" issues and make linkage with domestic and European cap-and-trade markets difficult. "To go off on a limb can be quite dangerous," claimed Olivia Hartridge, who formerly worked in the cap-and-trade markets developed by the United Kingdom and the European Union. "If you create a different system to track carbon you are adding more complexity," Hartridge said during an April 19 CPUC workshop comparing carbon cap-and-trade systems. She is currently an analyst with Morgan Stanley, which has a $3 billion investment in emissions reduction programs. State regulators are pursuing a "load-based" cap on private utilities, public utilities, and other load-serving entities to cut carbon dioxide emissions from the electricity sector. Developing a load-based cap is expected to help meet the state's greenhouse gas reduction mandate law, AB 32. Commission staff consider a load-based cap the preferable way to control emissions from power both generated within and imported into the state. "The CPUC is interested in trying a different model and one that works for California," said Julie Fitch, CPUC director of strategic planning. "We're really working to forge a common view," noted Nancy Ryan, commission president Mike Peevey's energy adviser. The EU cap-and-trade market and the one under development in the Eastern U.S. - the Regional Greenhouse Gas Initiative (RGGI) - both set caps known as "source-based," as opposed to a "load-based" cap on total power load that utilities send to the end user. The UK, which launched a cap-and-trade market in 2003 (subsumed by the EU scheme in 2005), also used a load-based cap (Circuit, Nov. 17, 2006). Other speakers at the meeting emphasized the need to create a carbon cap that maximizes energy efficiency and other low-cost gas reductions. "Best low-cost solutions are not residing at smokestacks," said Richard Cowart, Regulatory Assistance Project director. The assistance project, based in Maine, is a nonprofit organization that provides research and analysis to public energy officials. Cowart said that doubling energy efficiency under RGGI is estimated to decrease fossil-fueled power by 33 percent and lower customer utility bills by up to 12 percent. "Leakage" - the failure to reach targeted reductions because power producers skirt the cap to avoid higher costs - is a problem in both source- and load-based caps. Just how serious an issue it is is a matter of debate. Fitch said that the CPUC's proposed load-based cap could thwart generators from getting around a limit in greenhouse gas emissions because utilities' out-of-state power supplies are to be included and the underlying power plant identified. More than half of the emissions created by the production of electricity used in-state come from out-of-state projects, according to Fitch. Other thorny issues under consideration include how to design a cap to ensure compatibility with other carbon-trading programs, including anticipating parameters of an expected federal cap-and-trade market. "Integrity is key," said Nancy Seidman, Massachusetts Department of Environmental Protection division director. She said melding markets is challenging when carbon measurements differ or when one has a looser, less stringent cap and/or allows higher levels of carbon offsets in place of reductions. Another problem is when two markets have differing abilities to stop "leakage." To ensure real greenhouse gas reductions, Massachusetts is significantly limiting the amount of allowable carbon offsets, she noted. California regulators' cap design should consider whether federal preemption would kick in or whether a national market would allow for state markets with more stringent carbon caps, said Cowart. The CPUC initiated a proceeding to create a greenhouse gas cap on utilities in February 2006, prior to AB 32's passage. Following enactment of the state's greenhouse gas reduction law requiring a 25 percent reduction in greenhouse gases by 2020, commission staff have focused on submitting their load-based cap program to the California Air Resources Board as a recommended carbon-reduction strategy. The air board could adopt the CPUC's recommended load-based cap for utilities, but at the same time it could also approve a source-based cap for in-state generators that sell part of their power out of state. A source-based cap may be placed on oil refineries and other major stationary sources of CO2. The CPUC is expected to submit its recommendation for a load-based cap to the air board in January 2008.

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