California Readies for Cap-and-Trade Next Steps

Terrapass, cap and trade, California, refineries, Union of Concerned Scientists, Leon Kaye, energy efficiency, public transportation, environmental defense fund, gasoline prices
Valero refinery in Benicia, California.

In November 2012, California launched its cap-and-trade program, the second largest in the world after the European Union’s. The state’s largest carbon producers — businesses that emit over 25,000 metric tons of emissions annually — buy carbon allowances from the California Air Resources Board’s (CARB) quarterly auctions. Depending on who you ask, California’s carbon market is either a success or a drag on the state’s economy. The Environmental Defense Fund, for example, has touted California’s cap-and-trade as a global model for reducing emissions while creating new business opportunities. The Western States Petroleum Association (WSPA), on the other hand, regularly criticizes the program for what it says drives up the costs of business and could wreak havoc within the fuel markets.

The way California’s cap-and-trade program works is relatively simple. Large polluters, such as utilities, buy certificates for each ton of carbon they produce. Polluters who are successful in reducing their emissions can sell their allowances to other companies who are unable to do so, in sum creating a market-based price for carbon. The allowances will slowly decline in numbers over the years, so think of cap-and-trade as a form of musical chairs, with companies bidding on fewer certificates over time — motivating them to find ways to reduce their greenhouse gas emissions.

One of the first successful cap-and-trade programs was launched during the George H.W. Bush administration in 1990. Under the 1990 Clean Air Act, major polluters who were responsible for “acid rain” traded certificates in a move to reduce the emissions of such pollutants as sulphur dioxide. A generation later, California’s cap-and-trade program continues to grow: For example, the state has linked with Quebec’s cap-and-trade program, allowing the two to trade each other’s carbon allowances. And as of January 2015, petroleum refineries will also be required to participate within California’s cap-and-trade system. The energy companies are clearly unhappy about it, sharing scenarios of the state’s economy headed for a “fuels cliff.” But will California, the economy of which has been oft-described as careening over a cliff, really experience a disruption to its slowly recovering economy?

Fears of California sinking under the weight of a cap-and-trade program appear to be premature. The WSPA, for example, often cites a report issued by the Boston Consulting Group (BCG) on AB 32, the legislative act that launched a bevy of environmental programs including California’s cap-and-trade program. The report estimated the cost of gas would rise 14 to 69 cents a gallon due to cap-and-trade, and also predicted volatility in the energy markets that could lead to electricity price volatility similar to what roiled throughout California in 2000. BCG also suggested a new wave of price volatility, from rapid price fluctuations on future carbon markets. Coupled with the state’s low-carbon fuel standard, the BCS report suggested as many as four to six refineries could close in California by the end of this decade.

But a University of California, Davis report written last year, of which the WSPA was a sponsor, has shown such fears are overblown. Part of BCG’s scenario assumes expensive sugarcane ethanol from Brazil would be the primary biofuel available to refineries to allow them to be compliant with California’s air pollution laws. But the UC Davis study points out that several alternatives to sugarcane ethanol are on the market. Furthermore, the scenarios of refineries closing for good depend on a variety of factors: The continued demand for gasoline in California isn’t going away any time soon, and closing a refinery is a long, expensive process. It is doubtful energy companies will be quick to pull the plug.

Many organizations, taking a more holistic view, are making the case that cap-and-trade, along with the other programs under the umbrella of AB 32, are making a positive impact on the economy. The Environmental Defense Fund, for example, cites potential savings of $21 billion for the state by 2025 due to reduced health care expenses, a reduction in work days lost and a boost in energy security — and the cap-and-trade program, by creating a market for investment in energy efficiency programs and less carbon-intensive fuels, could account for 20 percent of the pollution cuts should all of AB 32’s programs continue as planned. And with transportation creating more pollution in California than utilities (in most states the reverse is true), the oil companies and their refineries have to be a part of this process.

Consumers are already seeing a difference. Walter Wang, an adviser with ZSA and Adjunct Professor at the University of San Diego School of Law, pointed out that many utility ratepayers have seen a “climate credit” on their bills this year. “There is real value in these programs going forward,” Wang said, “and while ‘energy efficiency’ isn’t sexy, there is immediate value and a short payback period.”

The Union of Concerned Scientists (UCS) also points out auction revenues from cap-and-trade can benefit the public good by providing revenues for investment in clean energy technologies and job training programs for workers disrupted by new programs; for now the plan in California is to fund the high-speed rail, fund other public transport programs, contribute to home weatherization projects for low-income families and offer new automobile buyers lower emission vehicle rebates.

And speaking of automobiles, during an interview I had with Adrienne Alvord, California and Western States Director at UCS, she explained that looking at only prices at the pump does not give the full story. “Our gasoline prices are higher per pump, but people are spending less on gasoline,” Alvord said. Despite California’s reputation as the land of the car, California ranks 15th from the bottom in gasoline consumption per capita; and despite prices higher than most of the country, per capita spending on gasoline is 13th lowest in the Golden State. As a result of cap-and-trade and other energy efficiency programs in California, a driver who buys a new vehicle now can expect to save $3,000 if he or she drives the vehicle over 15 years.

Consumers across all income levels are seeing the results, insisted Alvord. “We’re taking the revenue that we are raising from these auctions, and we’re using it to lower emissions,” she continued, “and 10 percent of those revenues from the cap-and-trade auctions are being directly invested in low income communities. We’re not just cleaning up the air, but are investing in those who can benefit the most, as in home weatherization programs that directly benefit those who live in some of the most polluted areas of the state.”

Taking a long-term approach is important if California’s cap-and-trade program will succeed. “We have no control over oil prices now,” said Alvord. “We can drill domestically for oil all we want, but it is still a worldwide commodity subject to global pressures. To the extent we can provide ourselves with different forms of energy and make vehicles more fuel efficient, and the more we are able to plan our transport system in a way to reduce our dependence, then we are less vulnerable to our problems.”

If we are ever going to stabilize the price of oil and prevent the shocks that have often roiled our economy over the years, the best way is to reduce our dependence on it. Requiring that oil companies pay for the pollution they create within a cap-and-trade system, and using those monies to diversify our energy portfolio, is a way forward — and another reason why the U.S., and much of the world, looks to California for new ideas.

Image credit: Wikipedia (Downtowngal)

Based in Fresno, California, Leon Kaye has written for TriplePundit since 2010. He has lived across the U.S., as well as in South Korea, Abu Dhabi and Uruguay. Some of Leon's work can also be found in The Guardian, Sustainable Brands and CleanTechnica. You can follow him on Twitter (@LeonKaye) and Instagram (GreenGoPost).

11 responses

  1. BP GMO fuel affect the water or beef?

    Does California water providers check for ethanol in the supply water for public consumption? Should California request a waiver of the “Wallet Flushing” ethanol mandate so fuel ethanol ozone is in federal EPA compliance?

  2. Oh this sounds so good so stick with it and don’t complain – while we bribe you with a tiny PG&E rebate and use billions for social engineering. Cap and Trade is responsible for the “Transit Oriented Development” movement that is forcing us into “stack and pack” soviet style housing and gentrifying the middle class out of SF. But that’s ok, it’s funding housing and stuff for the poor displaced. – more social engineering. It’s being implemented through unelected groups like Plan Bay Area and ABAG. Shame on us for allowing them to heard us like cattle! If you want to redistribute wealth, just tax the rich and give it to the poor, but stop telling people where and how they can and can’t live.

      1. I wish I could, but my hole is under siege. I live in the Eastern Neighborhoods of SF. We’re being inundated with stack and pack housing, congestion and overcrowding, with no substantial plan to provide adequate public transportation. We’re seeing the true impact of TOD delivered without the T. Our artists, musicians and middle class have been displaced. Most of my middle class friends have left the city. It sucks. So rather than stay in my hole, I must at least warn others to wake up before their neighborhood or city are ruined by these unelected “planners”. But don’t worry, mine is a small voice in the night. The well funded propaganda machine will win.

        1. I agree with you that SF is under seige but what is the city supposed to do? If you want to blame someone, you should blame all the cities on the peninsula and San Jose for failing to allow affordable, walkable neighborhoods. If San Jose were a nice place to live then there would be far less pressure on SF!

        2. Actually the Peninsula cities are the smart ones that will maintain a semblance of livability by not buying into overcrowding.

          San Francisco in particular and many other cities under TOD pressure will never be affordable as discussed here (with good suggestions at end):

          Blame doesn’t do a lot of good. But I blame the new regional quasi-government of unelected appointees (Plan Bay Area, MTC and ABAG) that are pushing the destructive misguided TOD agenda. TOD, sponsored by greed, is ruining San Francisco, gentrifying out our lower and middle class and diverse culture. It’s marketing propaganda is pushed with a cult like evangelism by all the usual “non-profit lobbyist groups”. TOD enriches the .1%, but has co-opted the left into supporting their enrichment by declaring it “green” and providing a pittance of units deemed “affordable” (that few real people can afford). Lol, the Left is shilling for the Right. This “New Urbanism” is being “sold” nationwide. Some places are fighting back eg. Alameda, Marin, Santa Monica, Atlanta. Educate yourself and save what you can of your city from selling out.

    1. Dude, people want transit oriented development. I could just as easily argue that “freeway oriented development” is also social engineering. If you want to live in the woods with the unibomber, go right ahead, no one’s stopping you.

      1. Dude, I’m an urbanist – always lived in big cities – rooted in SF. But the “new urbanists” seem to be determined to create “unLivable cities”
        You go build your high density boxes in the woods, nobody there to stop you.

    2. Unfortunately, You live in an area where computing and the web are worshiped like gods. All of the Techies in the Frisco area are totally disconnected with the reality in the rest of America.

      PS I said Frisco because I know how much they hate it.

  3. So what amount WILL gas prices increase? The Author does a good job of skirting that important issue. As we all know California already has the highest gas prices in the lower 48. A 69 cent per gallon price increase WOULD be a significant drag on the states economy and a hardship on the people who can least afford it. I am all for reducing carbon emissions but not at the cost of driving the middle class into poverty.

  4. They are counting on lower usage to keep prices down. As more factories
    close and ship in from Nevada and other states, there will be fewer jobs
    to drive to, thus cutting carbon and demand for fuel.

    Everything that moves other than on the backs of mules and men, will incur increased cost due to the tax on energy. The government proclaims this will not happen, therefor it is not to be discussed in any approved article. They refuse to acknowledge this fact.

    Have you noticed all the trucks on the highway? They are carrying things we eventually pay for. As their costs go up, prices go up. They get maybe 10 mpg with a tail wind. So 75 cents a gallon is 7.5 cents a mile more added to the freight bill. No one is going to eat that price increase but you.

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