California became the first state in the nation to approve a greenhouse gas cap-and-trade scheme that covers utilities, factories, other industrial stationary sources of carbon pollution, natural gas, and transportation fuels. “The cap-and-trade program builds on a legacy of leadership in our state,” said Mary Nichols, California Air Resources Board chair, during a packed Dec. 16 hearing. She called the broad-based program “the best insurance against future recessions” because it sends a “clear signal to the clean tech investment community.” “The jobs we are creating are green jobs,” said Governor Arnold Schwarzenegger, during a cameo appearance. “They are being created ten times faster than in any other sector.” The Air Board voted 9-1 to adopt the program pursuant to the state’s climate change law, AB 32, on a foggy, cold evening in Sacramento after an all-day hearing. The vote took place four days after the international community announced a modest framework for reducing greenhouse gases reached in Cancun, Mexico. The massive California plan, reflected in 1,000 pages, varies little from the blueprint the Air Board proposed at the end of last October. Utilities, generators in the state, those that send power into California, and other large industrial emitters are the first to be regulated beginning in 2012. Three years later, the carbon cap-and-trade program is to extend to natural gas and transportation fuels to cover 600 facilities in all. The January 2012 launch date is not set in stone. “There will be a lot of assessment going on over the next year,” said Nichols. “If we are not ready in 2012, we can delay enforcement.” The program also is expected to be adjusted after annual reviews. The trading program--almost four years in the making--caps about 80 percent of the greenhouse gas emissions created to fuel California. It allows carbon emissions trading among regulated industries and unregulated parties, like financial institutions, in an attempt to cut carbon emissions to 1990 levels. The program caps emissions in 2012 and then requires a 15 percent reduction by 2020 from current emission levels. At its launch, the Air Board is to give away for free--instead of selling--most of the carbon allowances available under the cap to utilities and those entities considered “trade sensitive.” Each allowance is supposed to represent one metric ton of carbon dioxide equivalent. Under the program, the number of allowances distributed decreases every year as the carbon ceiling ratchets downward. Private utilities that receive the allowances then are to turn around and sell any extra carbon allowances--when their emissions are below the carbon ceiling––to independent generators and others in regular auctions. Utilities are supposed to spend the money they raise in those auctions to benefit their ratepayers and to carry out programs that reduce greenhouse gas emissions, like investing in energy efficiency measures and renewable energy. Once the emissions rights are auctioned by private entities or the Air Board, companies are free to trade them both to satisfy their emissions reduction requirements or for profit. There are no restrictions on who enters the private carbon market fray. Air Board member John Telles urged that staff put in place protections to assure the price of trades, including the brokerage fee, “be transparent.” The regulators carved out a role for the Air Board staff to keep the price of carbon allowances from going haywire. The program sets a trading price floor of $10/ton of carbon. (Carbon currently is trading for as low as $2.00/ton.) The program also sets a $50 ceiling on allowances to help keep private trades within a predictable bandwidth. To keep a check on prices, the Air Board established a carbon credit reserve from which it can flood the market with emissions allowances if the carbon market soars too high to bring down the price. Private and public utilities largely backed the plan, while businesses as well as small and large environmental groups were divided. One key concern in developing the trading program has been how auction revenue should be used. There are calls to use the money to lower utility bills, particularly for low-income households in polluted regions, to increase funds for energy efficiency and renewable energy projects, and for environmental conservation. The regulation leaves room for expected legislation to set aside at least 10 percent of the auction revenue for polluted communities, Nichols said. Senator Kevin De Leon (D-Los Angeles) plans to reintroduce his “community benefits” bill seeking that end, which was vetoed by the governor. Other key controversies involve the level of offsets that can be used to satisfy the carbon cap, the protocol for forestry offsets, and allocation of the allowances. Offset projects reduce or sequester greenhouse gases, though not at regulated facilities, and provide emissions reduction credits for meeting the program’s greenhouse gas reduction requirements. For instance, planting trees removes carbon dioxide from the air and can provide offsets for power plants and other emitting facilities, often at a lower cost than directly cutting emissions at those facilities or replacing them altogether with lower emitting plants. At the hearing, a long line of forest conservationists warned against the provision allowing “even aged managed” forests, which are less diverse and robust than natural forests. Counting them as tradable carbon allowances would financially reward timber companies for clear cutting and replanting, they said. The Climate Action Reserve--which developed the methodology for creating forestry project offsets--and timber industry representatives rejected the forest activists’ claims. “The protocol does not incent clear cutting,” said Gary Gero, Climate Action Reserve president. In response, the board debated putting off a vote on the controversial “even aged management” provision. In the end, it voted 7-3 to keep it intact to avoid reducing the amount of carbon mitigation projects. Business industry groups objected to California standing alone in the national cap-and-trade milieu. “It’s an extra burden on the industries,” said Dorothy Rothrock, California Manufacturers & Technology Association vice president. Businesses need to be able to plan ahead for the projected costs and [the Air Board] needs to have the benchmarks by June,” she insisted. The overall cap for 2012 was set at a total 165.8 million tons of carbon dioxide equivalent. It is expected to decline about 2 percent a year each year to 2015. Then when natural gas and fuels are brought into the program the cap is to rise to 334 million metric tons of greenhouse gases. The trading program also: -Gives the Air Board executive director the authority to set caps according to a specified formula for individual utilities and other regulated entities; -Sets a three-year compliance cycle; -Covers emissions generated by the Department of Water Resources that operates the State Water Project, which moves potable surface water to farms and cities in Central and Southern California; -Allows companies to bank unused emissions credits for future use without restriction; -Requires independent third party verification of carbon allowances; and, -Plans to consider expanding eligible offset projects, including potentially ones aimed at preserving international forests. Emissions reductions are expected to be reaped by other laws and rules, such as tailpipe standards for cars, energy efficiency programs, a shift to larger supplies of renewable energy, and specific standards for various industries.
