State Market Committee Advises Hybrid GHG System

The state?s Market Advisory Committee endorsed a hybrid approach of monitoring emissions both at the point of combustion and upstream sources of pollution. In a final public hearing June 12 on its draft recommendations for a cap-and-trade system to reduce greenhouse gases, stakeholders universally praised the committee?s recommendation for a broad-based carbon trading market to supplement a regulated ?command and control? cap on carbon emissions from all sources. Stakeholders sparred, however, over whether credits should be auctioned off or freely allocated to emission sources. Also, there was no consensus on whether credits should be extended to offsets for power projects not subject to carbon caps, and whether there should be a ?safety valve? that would place an upper limit on carbon allowances. Independent power producers voiced concerns that a cap-and-trade system could create price volatility, market power, gaming and other uncompetitive activities, windfall profits, and stranded assets. Industry groups warned that the costs of regulatory compliance could drive businesses out of state, resulting in loss of California jobs and increased emissions in neighboring states. Consumer advocates urged state regulators to adopt strict measures to protect consumers from unfair prices. Environmentalists and public health advocates cautioned that a market trading system should not undermine existing air quality protections and create toxic hot spots in low income minority communities that are already overburdened with industrial pollution. ?The major advantage of cap-and-trade is it can establish an unambiguous cap on total emissions and remove uncertainty,? explained Stanford climate economist Larry Goulder, the committee?s vice chair. The Market Advisory Committee was formed under Governor Arnold Schwarzenegger?s administration to implement AB 32, the state?s greenhouse reduction law, which requires the state to cut its emissions 25 percent by 2020. The committee published a 105-page draft report June 1 aimed at maximizing the reduction of carbon emissions by extending credits for early reductions and incorporating all major sources of pollution, including transportation, electricity, and industrial sectors (Circuit, June 8, 2007). Schwarzenegger has strongly advocated creating a California market for trading carbon credits. However, the California Air Resources Board will make the final decision whether to adopt a cap-and-trade system. Committee chair Winston Hickox said that existing state regulations, such as energy efficiency standards and Title 24 building controls, would likely help California reach its 2020 carbon reduction goal quicker than market mechanisms. A cap-and-trade program in California likely would not begin until 2012, he said. Because of California?s leadership in enacting landmark global warming legislation last year, the state is widely expected to set a standard for designing carbon trading markets in other states and a federal program. The committee recommended that California?s carbon market be linked to other carbon trading markets to allow for uniformity and reduce costs. Independent power producers?which own about a large amount of California?s generation capacity?would be unfairly impacted by the cap on carbon emissions, said Steven Kelly, policy director for Independent Energy Producers Unlike regulated utilities, independent generators cannot recover the costs of carbon reductions from ratepayers since their output is locked up in long-term power purchase contracts between qualifying facilities and utilities, he said. Yet independent generators have invested billions of dollars in developing clean and efficient renewable, co-generation, and natural gas-fired power plants in California. The committee?s report ?glosses over? this discrepancy and assumes that all generators could pass on the costs of regulatory compliance to consumers, Kelly said. ?We?re concerned about cost-effectiveness, fairness, simplicity, and leakage. The California fleet is relatively clean compared to out of state generation.? Despite IEP?s concern, at regulatory levels like the California Public Utilities Commission and California Independent System Operator, generators are expected to be able to pass through the cost of credits to utilities (see story below). AES, which owns 8 percent of California?s installed capacity, recommended four ?solutions? that would enable independent generators to pass through their compliance costs: - Provide independent generators full recovery of CO2 allowances through a portion of the auction proceeds; - Provide an allowance reserve for set asides for generators; - Allocate allowances through grandfathering; and - Require contract holders (utilities) to reimburse independent generators. However, committee members said AES?s suggestions could amount to giving independent generators a competitive advantage. They noted that generators already factor in the costs of installing emissions control technologies and other environmental compliance measures in their power contracts. The carbon tax should be treated no different, they said. Investor-owned utilities and industrial and business groups endorsed the committee?s recommendation to allow offsets for emission reductions by both California and out of state sources not subject to the cap-and-trade program. Environmentalists sharply disagreed, arguing that permitting in-state sources to offset their carbon emissions would violate AB 32, which requires reductions of carbon emissions generated in California to improve the state?s air quality. ?It?s not a job we can hire out to other regions and jurisdictions,? said Bill Magavern, Sierra Club legislative coordinator. Over-reliance on offsets would ?severely dampen? the development of new technology and alternative fuels that will move the economy away from dependence on fossil fuels, he stressed. Consumer advocates expressed concern that price volatility and market power would cause customers financial harm. They warned that consumers must be protected from unfair price hikes from the carbon cap to prevent a political backlash that would prohibit a carbon trading market from being launched in California. Consumer advocates also urged the Air Board to use auction revenues to expand low income ratepayer programs, protect small users from rate hikes, and other consumer programs.

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State Market Committee Advises Hybrid GHG System

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