Stick & Carrot Juice

I may be one of the few who found some benefits in the old "command and control" style of regulation. I appreciated its ease: "just do it and quit bellyaching." Sometimes the commands were wrong, but I appreciated its relative simplicity compared to the pretzel-factory machinations of trying, and often failing, to create a workable market-based alternative. But now the days of command and control are gone, along with vertically integrated utilities. Despite The Utility Reform Network's recent embrace of that all-inclusive and perpendicular structure, competition from private generators appears here to stay. It is a mixed blessing. On one hand, it brought us the energy crisis; on the other hand, it may bring some efficiencies into building and operation, as well as a broader base of energy sources. Given that utilities will be buying about 80 percent of their power from nonrenewable sources in the future, and that the state is not going to command them to buy any particular shade of brown power, that leaves market-based constructs to give incentives, or disincentives, for pollution. There are two primary market devices on the table, the carrot, renewable energy credits to make the mandated 20 percent of utilities' power green. And the stick, emissions cap and trade, to make the balance less brown. Renewables credits are close to becoming reality. It appears that unless there's huge new solar power construction in the San Diego area, credits are necessary for San Diego Gas & Electric to meets its 20 percent requirement. One legislative move last year was quashed, but another bill this year is taking up the case. Basically, a credit, or green tag, is a "commodity" separate from the electricity produced by a renewable source. That tag represents the environmental and social assets of the energy source. It can be bought by, say, SDG&E in order to allow the utility to comply with the 20 percent renewables mandate-even though the utility does not have that much renewable generation. That leaves cap and trade to adjust much of the global warming quality of the other 80 percent. The "cap" is a set emissions limit from a government or regulator. Carbon dioxide polluters can buy credits from cleaner plants to meet the limit. If their plants are cleaner than the limit, they can sell the balance as credits. At least, that's the theory. Cap and trade is envisioned for CO2 because other pollutants are generally regulated. Carbon dioxide is a product of burning fossil fuel. You get less from natural gas, a lot more from coal. The most common global warming theories attribute temperature increases to increases in the greenhouse effect caused primarily by carbon dioxide. Models predict that temperatures will increase up to 5.8?C by 2100. Carbon dioxide has escaped most regulation. You can breathe it or drink it in your favorite soda. (That's my idea for carbon sequestration-let Pepsi and Coke handle it.) It won't hurt you. But let it rise into the atmosphere, and it increases global warming. "CO2 is strictly an unpriced externality" in the marginal cost of producing energy, according to the California Public Utilities Commission. CO2 is not consistently regulated at either the federal or state levels and is not embedded in energy prices. Meanwhile, other air pollutants from power production, such as sulfur dioxide, are regulated under the federal Clean Air Act. While cap and trade could scrub some of the brown from the 80 percent of the state's electricity that will be from fossil-fueled sources, it remains theoretical because no one U.S. agency, regulator, or government has come up with a price on pollution that sticks. The Kyoto Protocol was supposed to handle that problem on a world level by allowing creation and transfer of emissions permits between countries, but the U.S. has refused to sign it. The Climate Stewardship Act of 2003, a.k.a. the McCain-Leiberman bill, also fizzled. The bill would have established a cap on allowable carbon dioxide and five other greenhouse gases, at year-2000 levels. It would have given allowances to incumbent polluters and set the balances of allowances to be auctioned by a Climate Change Credit Corporation. It was narrowly defeated in late 2003. However, the California Public Utilities Commission did come up with a price on CO2 this year. Buried in a decision on avoided costs (D05-04-24) was the commission statement that for purposes of evaluating the relative benefits of potential energy-efficiency programs, the methodology includes a $5/ton adder on CO2, going to $12.50/ton in 2008 and "higher values thereafter." According to the author of the decision, it is supposed to be used only for comparing the benefits of, say, an air conditioning cycling program against the benefits of a lighting reduction program in a utility's system. Still, it's a price on CO2. A low one, but it's a start. The price details are the most important issue in a cap-and-trade program. They have to be high enough to create an incentive for polluters to invest in controls, but not so high that the credits are priced out of the market. To make California's 80 percent portfolio of polluting energy supplies contribute less to greenhouse gas supplies and global warming, California could start right here instead of waiting for national and international intervention. SB 527 created the voluntary California Climate Action Registry as a foundation for trading rights and/or pollution credits. The organization is keeping track of big companies' moves to decrease greenhouse gases, as well as power plant owners?' changes that effect CO2. If the CPUC can put a price on carbon for efficiency methodology purposes, why not for trading purposes? It would be a pilot and a proving ground for a system. The commission has acknowledged, as part of routine hearings, a cap-and-trade framework based on the principles of the organization Sky Trust. A recent analysis done for the CPUC would have emission rights given to Sky Trust, which would then sell to producers and importers of fossil fuels in the form of tradable allowance. "In order to incorporate tradable allowances into the procurement framework, the annual cap on carbon-based procurement would need to apply to the combined procurement portfolios of Pacific Gas & Electric, Southern California Edison, San Diego Gas & Electric, and SoCal Gas," notes the report (R04-04-003) . Still, in order to have a long-term effect on the 80 percent brown supply, it has to include Western states. If California were an island, the probability of its electricity supply portfolio getting that much dirtier in the near term wouldn't be that big. But with the drumbeat of new domestic coal plants to be located outside California-Sempra's proposal for one in Nevada and one in Idaho, and the governor's plan to build a huge new transmission line, the Frontier Line, from Wyoming to bring in new coal-fired generation-the potential for massive new sources of pollution is only a few years away. Even if California were to go back to "command and control," the cross-border nature of electricity would just cackle a laugh and shrug its Reddy Kilowatt shoulders while zooming off to the next receptacle. One thing the energy crisis taught both (de)regulators and those who were accused of manipulating the system for profit, electricity is not just a commodity. Many consider it a right of civilization. It can lift economics or crash and burn the economy. While in theory, the commodity of electricity can be called such and separated from its environmental effects for purposes of societal benefits, in reality, the commodity can't be separated, or ignored-as is the custom today. "Electricity is not simply electricity. It is also an embodiment of the conditions and rules under which it was made. It bears the conditions of its creation with it." That's what Tom Anathansiou, a climate change activist and author, said. The conditions of its creation-drilling, mining, burning, transportation-are a cost to all of us even when they are located thousands of miles away, say in Wyoming. We need to account for that by implementing a pollution control system for the next generation of supply.

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