JUICE: Big Cap, Little Underneath

By Published On: February 29, 2008

It’s unusual for a news organization–large or small–to share much about its inner workings. When it does, it can be illuminating. First, though, this caveat: Daily and weekly deadline pressures make news reporters and editors a fidgety lot, impatient with the often glacial pace of legalistic processes. We live for the final decisions, actions, conflicts, big deals, and dramatic events that are the stuff of good news stories. We’re also drawn to the inside tips that allow us to beat the competition. Last week, the writers and editors at this publication had to slow down a bit and remember the old journalism school maxim: “Get it first, but first get it right.” The situation arose when a seemingly well-placed source confided that under California’s new global warming law, AB 32, state regulators had all but decided to allocate carbon emissions allowances in a way that would make utilities that rely on relatively clean forms of generation carbon credit rich. The decision, the source continued, promised to put coal-heavy utilities in a position of having to purchase carbon credits from those cleaner utilities, resulting in a transfer of billions of dollars. However, because the credit allocation decision was considered so patently unfair, the source went on, it threatened to create a strong backlash that had the potential to completely undermine the law, AB 32, or at least create serious roadblocks. As we independently investigated the claim, we could find little to corroborate it, leading us to ask whether it was an intentional attempt at spin, or a just an innocent misunderstanding. We may never know, but we do know the incident shows the human propensity to create suppositions when faced with an information void. We further know that such a void remains concerning what state regulators specifically want businesses to do under AB 32–particularly the power industry. Regulators’ lack of decisions have left stakeholders all dressed up for the big Cap & Trade ball with nowhere to go. Understandably, as time wears on, their starched collars and cuffs and nylons are getting hot and itchy, giving voice to a rising din of grumbles and speculation in the halls of the state agencies charged with administering AB 32, chiefly the California Air Resources Board. But just like impatient reporters, anxious to run with a scoop, it pays regulators to first get it right. They are making progress and the outlines of an AB 32 plan are beginning to emerge. Here’s where things stand and where questions remain for the power industry: Cap & Trade: It is widely assumed that the California Air Resources Board is planning a cap-and-trade program to partially implement AB 32 and that the power industry somehow will be part of it. However, the question has not been decided and forces are lining up against cap-and-trade. On the one hand, the Los Angeles Department of Water & Power is questioning the need for cap-and-trade and seeking rules that simply would limit emissions from power generation based on clear cut performance standards. These limits could, for instance, be based on emissions levels achievable using “best technology.” Best available technology standards are based on emissions rates using the cleanest equipment commercially available to an industry. Los Angeles finds an ally among environmental justice groups, which are asking the state to drop the concept of cap-and-trade and instead institute similar performance standards, along with a carbon emissions fee that could be used to promote new economic opportunities by greening the state’s economy. The Air Board does not discount reliance on such performance standards and may establish only a small-scale cap-and-trade program, at least initially. It also has decided to model the effectiveness of a carbon fee as a tool for cutting greenhouse gases. Point of Regulation: In its deliberations, the Air Board says it is focusing–at least to start–on modeling the economic impacts of regulating generators of electricity under a cap-and-trade program. Its modeling also will assume greater use of renewable energy under the state’s renewables portfolio standard and greater reliance on energy efficiency. According to their draft decision, the California Public Utilities Commission and California Energy Commission appear ready to recommend that the Air Board regulate deliverers of power to the grid. Whether that’s a distinction without a difference remains to be seen. What seems clear, though, is that the concept of capping emissions for utilities based on their power loads is no longer a top tier option among regulators, for a host of administrative and legal reasons. Allocating Emissions Credits: First of all, any allocation of emissions credits assumes that the Air Board goes ahead to create a cap-and-trade program. The CPUC and CEC in their draft decision recommend that some of the emissions credits be auctioned. The rest would be “administratively” allocated, meaning: given away for free. Air Board chair Mary Nichols also has said that the board likes the concept of auctioning at least some of the emissions rights to create a fund the agency could administer to promote research, development, and deployment of low carbon technologies, as recommended by the board’s Economic and Technology Advancement Advisory Committee. This raises the question of whether any initial cap-and-trade program would cover only a small portion of the emissions from the power industry, particularly through the year 2020, the target date for cutting statewide emissions to 1990 levels. If so, one option would be to auction credits for only the portion of the industry’s emissions covered by cap-and-trade. This would limit trading to only credits that were auctioned. Cap & Basis for Credit Allocation: Another major factor in the scope of any cap-and-trade program is the cap itself for those covered by emissions trading. This is inextricably linked to the basis for determining the amount of credits to be allocated. It is in these decisions that questions of equity largely arise. Will the Air Board base allocations to the industry on its historic emissions, requiring it only to roll back to the 1990 level, or on what’s technologically and economically achievable, which likely would require deeper cuts in greenhouse gas emissions? No decision has been made. Both the CPUC and CEC, which are to recommend to the Air Board how to regulate the power industry, say they need to study and discuss the question further. The Air Board’s emissions inventory is illustrative. It shows that the power industry’s emissions have risen only slightly since 1990, just about 6 percent. At the same time, transportation emissions have risen 21 percent. Another unknown is whether the Air Board will go light on motorists, allowing them to drive big sport utility vehicles with some minor mileage improvements as mandated under the tailpipe standards it set under AB 1493? Or will the board squeeze automakers more so it doesn’t have to crack down as hard on the power industry and other California businesses? Air Board staff say they plan to further tighten the standards for autos, but probably not until late in the next decade. A recent economic study presented to the Air Board concluded that there is great potential to cut greenhouse gas emissions from cars while saving motorists money far beyond what is expected under the agency’s existing tailpipe standards and low carbon fuel standards mandate. Meanwhile, regulators are highly concerned that cutting emissions from the power industry could raise electricity bills. Under existing policies, the state already expects the industry to achieve deep energy efficiency improvements, a 33 percent renewables portfolio standard by 2020, and a phase out of coal power unless it includes carbon capture and sequestration. Then there is the widely heard assumption on the street that cap-and-trade would require greater and more expensive reductions from utilities that depend heavily on coal-fired power, like the LADWP. That would not be true, however, if the Air Board chose to return individual power industry players only to their 1990 emissions levels. The department itself estimates that its carbon dioxide emissions levels fell 8.3 percent between 1990 and 2004 due to greater reliance on renewable energy, modernization of existing plants, greater customer energy efficiency, and other factors. This trend appears set to continue with closure of the Mohave coal plant–the power from which was imported into Los Angeles–the department’s stepped-up drive toward renewable power and energy efficiency, and plans to further modernize its existing gas-fired plants. Indeed, if regulators allocate emissions allowances under a cap-and-trade market based on historical emissions, Los Angeles could be an immediate net seller of credits. So, it appears that cap-and-trade may accomplish little within the power industry. It could add flexibility and perhaps save some money to the extent that it was instituted as a replacement for existing renewables portfolio, energy efficiency, and coal contracting policies. Forthcoming economic modeling might provide some answer as to whether it could save money by allowing flexibility. However, it is hard to see how it could achieve additional emissions reductions from the industry.

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