In California, the impulse to reduce climate-changing greenhouse gases has been overtaken by the impulse to redistribute and spend massive amounts of money.
The likely result: higher than necessary GHG emissions and a less productive California economy.
The 2006 legislation regulating GHG emissions, AB 32, established the goal of reducing emissions statewide to 1990 levels by 2020. The legislation called out “market mechanisms” to achieve these reductions, and in this spirit, the primary means to accomplish this goal is a “cap-and-trade” system.
Last year, the Air Resources Board adopted a regulation placing a cap on aggregate emissions from sources that account for about 80 percent of total GHG emissions. The cap eventually will cover about 350 facilities, such as refineries, power plants and food processors.
Over time, the cap will ratchet down, reducing allowable emissions. But the regulation also creates “allowances,” which are tradable securities that give permission to emit a ton of GHGs per allowance. The creation and trading of these securities will enable the market to determine the most efficient allocation of GHG emissions: those industries and plants willing to pay more for permits to emit GHGs will continue to produce in California, while other industries will choose to invest in efficiency upgrades or not produce in California.
That’s the theory, anyway.
But as the idea has emerged from the meat grinder of legislative and regulatory politics, the whole notion of an efficient, market-driven system has been turned on its head.
Instead of allocating emission allowances and letting the market determine the most efficient use of aggregate energy in California (a pretty close proxy for GHG emissions), regulators and politicians are proposing to sell an increasing number of the allowances in order to (1) discriminate among different types of industries and economic sectors and (2) raise billions of dollars in new revenues to spend on new programs or subsidies.
To be clear, whether allowances are sold or freely allocated, as the Legislative Analyst has stated, “All of these approaches will achieve the required GHG reductions. This is because it is the declining cap on emissions that will reduce the state’s overall level of GHGs – not the manner in which allowances are introduced into the market.”
But there is an environmental risk to an inefficient allocation of allowances, known a “leakage.” In a recent white paper, Rob Stavins of Harvard and Todd Schatzki of Analysis Group concluded that “allocation choices may indirectly affect emissions through emissions leakage if economic activity shifts to unregulated sources due to cap-and-trade costs. In the context of California’s GHG cap-and-trade program, leakage is most likely to occur if all allowances are distributed through some combination of auctions and fixed allocations.”
A poorly designed allocation mechanism will not only cause higher emissions, but will reduce economic productivity. Again, according to Stavins and Schatzki, “Leakage can raise costs if production shifts from California to otherwise less efficient or more distant producers (with higher transportation costs) simply to avoid carbon costs.”
Even in the face of evidence that auctioning allowances is bad for the environment and bad for the economy, regulators at the Air Board have scheduled an auction this November that will sell 10 percent of allowances. From there, allowance sales will ramp up to as much as 50% in 2015 and 70% in 2018. This will raise billions of dollars for state programs over the next eight years, unhampered by a two-thirds vote of the Legislature, not to mention any vote of the people.
With evidence mounting that their chosen path is misguided, discriminatory and expensive – if not unlawful – the Air Board can still make adjustments to the program. At a hearing this Thursday, the staff will update the Board on progress in implementing AB 32. The Board should direct staff to refashion the cap-and-trade program from an auction to a free allocation of allowances, which will improve overall efficiency without diverting the state’s GHG reduction goals.