California voters back weakened climate law
-The opinions are the author’s own-
California voters on Tuesday rejected a measure to suspend the state’s innovative climate change law. But the state’s emission trading scheme has been substantially diluted to buy off opposition from energy-intensive industries and allay fears about job losses.
If it is true that “as California goes, so goes the nation”, the past 10 days have confirmed the lack of political support for tough emissions curbs.
The survival of California’s cap-and-trade scheme has kept alive hopes for enacting a patchwork of state and regional schemes in the absence of a federal program. Supporters hope establishing even a diluted system will lay the groundwork for a program that can be toughened as the economy improves.
But the state government’s last-minute decision to give away most emissions allowances rather than auction them suggests voters and politicians are not ready to embrace the steep increase in energy prices needed to decarbonize the economy.
“NO” ON 23
Proposition 23 would have suspended the 2006 Global Warming Solutions Act (AB 32) until the state unemployment rate fell below 5.5 percent for four consecutive quarters. Proposition 23 would have effectively killed the law because unemployment is currently over 12 percent and has only rarely dipped below 5.5 percent in the last three decades.
Voters rejected it by a wide margin following a heavily funded campaign pitting clean technology companies, environmentalists and moderate lawmakers against parts of the oil refining sector. With 92 percent of precincts reporting, “No” votes led “Yes” votes by 4.2 million to 2.6 million (61 percent to 39 percent), according to the Los Angeles Times.
Supporters of emissions trading spent heavily in the final weeks of the campaign, often portraying Prop 23 as the creation of out-of-state oil companies and a threat to the creation of a high-technology clean technology industry based in the state. The refiners have had the last laugh, however. They may have lost at the ballot box, but their lobbyists won in the halls of the state government in Sacramento.
On Oct. 28, just days before the vote, the California Air Resources Board (CARB), which is responsible for designing a cap and trade system, released its proposed implementing regulations, buying off opposition from refiners and other energy-intensive industries by granting them a large number of free emissions allowances.
CARB over-ruled its own Economic and Allocation Advisory Committee (EAAC), which had recommended all or almost all allowances should be auctioned to raise revenue and avoid windfall gains to recipients of free allowances, which have proved controversial in Europe.
EAAC had recommended free allocation only for the purpose of addressing emissions leakage associated with energy-intensive, trade-exposed industries, and then only in circumstances when the alternative of some form of border tax adjustment is not practical. In most cases the committee thought border adjustments would be feasible and preferable.
EAAC recommended against using allowance revenues to compensate electricity and gas companies or their customers (except for a small number of poor households which should receive financial assistance to avoid undue hardship).
Instead, the committee argued that 75 percent of auction revenues should be returned to households in the form of lump sum payments or cuts in income and sales taxes. The remaining 25 percent should be devoted to supporting low-income households, hard-hit communities, environment remediation programs, and public and private investment in emission-reducing technology.
EAAC ended up supporting a version of the cap-and-rebate system, which gained traction in Washington as federal climate legislation began to falter.
All of that has now gone, to be replaced by a traditional scheme, which benefits industries most directly affected through a generous allocation of free allowances.
Electric distribution utilities will receive free allocations to limit price increases for ratepayers (proposed Section 95892, California Code of Regulations). Most manufacturing and energy-producing companies will also receive free allocations corresponding to between 40 and 85 percent of their requirements through 2020.
The most generous assistance is targeted for oil and gas producers, steel, paperboard, glass, ceramics and chemicals sectors, which could receive up to 85 percent of their requirements free through 2020. Cement makers would receive even more help. Also protected are food manufacturers, brewers, refiners, smelters and turbine manufacturers (Table 8-1, Section 95870).#
CARB is worried about excessive volatility in emission allowance prices. To ensure emissions prices do not fall too low, stunting the development of clean technology, the proposed regulations set a floor on prices by fixing a reserve price for auctions. Minimum auction prices will start from $10 per tonne of carbon dioxide equivalent in 2012, rising by 5 percent in real terms each year (Section 95911).
CARB is also anxious about the fallout of prices rising too quickly or spiking. So some allowances will be held back for a “price containment reserve”. The reserve will hold 1 percent of allowances in 2012-2014, rising to 4 percent of all allowances in 2015-2017 and 7 percent in 2018-2020.
Reserve allowances will be auctioned at $40-50 in 2012, rising 5 percent in real terms each year, which is meant to act as a safety valve (Section 95913). The aim is to avoid sudden price increases that would test political support for the system.
While most analysts focused on the public battle over Proposition 23, it is clear the real battle was fought in private by regulators, environmental groups and industry lobbyists over allowance allocations. Energy intensive industries were granted free allowances in return for an understanding they would not campaign to overturn the whole program by backing Prop 23.
Watering down the system and grandfathering in much of the state’s heavy industry was the price for allowing cap and trade to survive in California and keeping prospects for regional schemes such as the Western Climate Initiative (WCI) alive.
It was not necessarily a bad deal for environmentalists and supporters of emissions markets. Passage of Proposition 23 would have been a disaster for them, dooming the concept at state, regional and federal level. The current regulations at least set up a system that should achieve emissions reductions by 2020. If public acceptance rises, they could be tightened substantially in the following decade.
The vote on Proposition 23 and concessions made to industrial interests and energy companies to secure their support (or at least acquiescence) confirm that public support for emissions curbs is fairly widespread, but not very deep.
Cap and trade programs can survive, but only if powerful vested interests are co-opted and bought off in advance, and emissions prices do not rise too far too fast.
Proposed Regulation of the California Air Resources Board (CARB), October 2010: http://www.arb.ca.gov/regact/2010/capandtrade10/capv1appa.pdf
Recommendations of the Economic and Allocation Advisory Committee (EAAC), March 2010: http://www.climatechange.ca.gov/eaac/documents/eaac_reports/2010-03-22_EAAC_Allocation_Report_Final.pdf