The California Air Resources Board (CARB) yesterday voted to approve California’s first-of-its-kind carbon market to reduce pollution across the California economy. While we will continue to work with CARB to ensure the program is implemented effectively, the program as designed will position California to make good on its AB 32 pledge to reduce GHG emissions back to 1990 levels by 2020. In the meantime, much work remains to finalize and implement the suite of policies developed under AB 32 to steer California towards a clean energy future. Here are some key developments to keep your eye on.
Carbon Market to Reduce Pollution: What’s Next
The Board vote marks the end of a long regulatory process, spanning years of stakeholder meetings and workshops, to address key elements of program design and arrive at an overall regulatory framework. But within that framework, many important questions remain. As California gears up for the launch of the program on Jan. 1, 2012, here’s what to watch for over the coming year:
1. Allowance distribution in the electricity sector
CARB has determined the total number of allowances that will be allotted to cover emissions from the electricity sector (starting in 2012 at 98 million and declining 15% by 2020), but only today put forward the basic structure of its methodology for allocating emission allowances in the electricity sector. CARB is attempting to balance the need between rewarding utilities who have already taken steps to lower their carbon footprint and the need to afford utilities transition time to make investments in low carbon alternatives. CARB will hold at least one public workshop to further consider how to reconcile these objectives. Ultimately, the allocation scheme CARB arrives at will play an important role not only in shaping the utility market for emission allowances and offsets, but also in stimulating utility demand for energy efficiency and new renewable electricity.
2. Auction revenue allocation in the electricity sector
The regulatory package approved by the Board defers critical questions relating to the use of auction revenue in the electricity sector to the California Public Utilities Commission (CPUC) and the local governing boards of the state’s publicly-owned utilities (POUs). The CPUC regulates the state’s investor-owned utilities (IOUs), like PG&E and Edison, but has no jurisdiction over the state’s POUs, like LADWP and SMUD. We anticipate the CPUC will initiate a formal proceeding to invite stakeholder input and resolve these issues for the IOUs. The format for the POUs will vary by utility, but we encourage every local governing board to institute a robust, public process to ensure auction revenue is benefiting customers and achieving emission reductions beyond what is already required by California law.
Whether investor- or publicly-owned, CARB entrusted California’s utilities with allowance value for the exclusive benefit of customers and to further the goals of AB 32. The utilities are in a unique position to carry this out. But with roughly $1 billion annually at stake that can fund critical investments in energy efficiency and renewable electricity and offset any impacts on low income customers, it is imperative our regulators hold the utilities up to task.
3. Auction revenue allocation in the transportation and industrial sectors
CARB has also largely left it up to the Legislature to determine what to do with revenue generated from auctioning allowances to transportation fuel providers and industrial sources that require additional allowances to meet their compliance obligation. State law will require the Legislature to appropriate auction revenue for purposed related to AB 32, but that still affords the Legislature significant discretion on the use of billions of dollars in public value (note that Prop 26, which places additional limitations on the state’s authority to impose fees to hold polluters accountable and mitigate environmental harms, will not apply to fee revenues collected under AB 32). To put California firmly on the path towards a low carbon, clean energy economy, it is essential that the Legislature invest this revenue wisely.
4. Linkage with the Western Climate Initiative (WCI)
The Board vote positions California to link with programs approved by partner jurisdictions in the WCI, a collaboration of seven U.S. states and four Canadian provinces to create a broader Western carbon market. CARB’s action follows closely on the heels of the New Mexico Environmental Improvement Board, which voted recently to establish an in-state GHG emissions cap starting in 2013. Because California accounts for over half of all GHG emissions in the WCI, many WCI partners were waiting for California to act (and for the results of Prop 23, which would have prevented California from moving forward with a cap and trade program). With California on board, and Prop 23 roundly rejected, the prospects for a North American carbon market are once again looking bright.
5. Offset protocol development
The program currently allows covered entities to submit offset credits (limited to 8% of their compliance obligation) from four approved offset protocols: urban forest projects, U.S. ozone depleting substances projects, livestock manure (digester) projects, and U.S. forest projects. The regulations provide, however, that additional protocols – including international offsets –will be reviewed and brought to the Board for consideration as the program progresses. Monitoring the ongoing protocol development will be critical to ensure offset credits from new protocols comply with the firm requirements established under the program.
AB 32 Implementation
Amidst all the fanfare, it is easy to forget that the cap and trade program is only one piece of a package of regulatory policies developed under the AB 32 Scoping Plan to meet our emission reduction goals at least cost (and not even that big of a piece: CARB currently estimates that the program will account for roughly 18-27% of the required emission reductions). Outside of cap and trade, several important steps remain for California to move forward with implementing AB 32 successfully.
First, and perhaps chief among them, is the need to pass a 33% Renewable Portfolio Standard (RPS) bill. After last year’s effort (SB 722) fell short in the dying minutes of the legislative session, it is critical that California get it done this time around. While, to their credit, CARB has moved forward with a program to achieve the same 33% target via regulation, it in the interests of all stakeholders to reach agreement on the outstanding issues through the legislative process and solidify the RPS in statute.
Also on the agenda will be defending California’s Low Carbon Fuel Standard (which is currently embroiled in litigation in the form of two lawsuits from the old, dirty ethanol industry and the oil industry), finalizing the industrial audit measure for large industrial sources of GHG emission, ramping up energy efficiency investments in our homes and businesses, developing regional plans under SB 375, and moving forward with California’s advanced clean car (or “Pavley II”) standards. All of these programs, critical to the success of AB 32, will deliver significant energy savings and dollar savings at the pump and in lower energy bills.
Clearly, California has a busy clean energy road ahead of it.