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Cali’s Cap-and-Trade Moves Forward in Tough Economy

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California has always been proud of its lead in promoting renewable energy, but it’s realizing the difficulties of advancing that agenda in the face of the poor economy and an unemployment rate around 12 percent. Today marks the first day of a 45-day period for the public to comment on a program to force polluters to cap their carbon emissions starting in 2012, and the proposed rules will give away lots of free permits rather than auctioning them.

The cap-and-trade program (PDF), a key piece of the Global Warming Solutions Act, or AB32 as it’s commonly called, was meant to serve as a model for other states and even the federal government. Signed into law in 2006, AB32 aims to reduce the state’s emissions to 1990 levels by 2020. To do that, the state has been drafting rules with wide-ranging effects, including how much renewable electricity its utilities must serve up to its customers (33 percent by 2020).

Carbon cap-and-trade systems became popular in Europe as a means to cut emissions by forcing companies to pay if they emit over government-set limits. Big polluters, such as owners of power plants, cement factories and oil refineries, could buy permits to pollute from those who emit less. The number of permits decreases overtime in order to force polluters to find ways to reduce the amount of greenhouse gas emissions going to the atmosphere, such as using new technologies to harvest and re-use carbon dioxide from power plants. Even in the European Union, which boasts more progressive climate change laws, some countries have fought hard against cap-and-trade rules they believe would add significant operational costs to their businesses.

The current proposal for the cap-and-trade program in California will start by targeting big polluters, of course, and it calls for giving away permits free to industrial operators in the program’s initial years. The state regulators say they are mindful their cap-and-trade rules could increase operating costs for businesses, which tend to pass on the costs to consumers. So they want to give businesses time to adjust their operations to comply with emission restrictions. California has a huge budget deficit/debt and an unemployment rate of about 12 percent.

Businesses in oil and gas mining, cement, glass, iron and steel production, food processing, among others, would get free permits; some would get free permits through 2020, while others get them for a shorter period of time. State regulators also are proposing using the free permits as awards to businesses that historically have taken actions to reduce their carbon footprint.

The “transition from the current state of the marketplace is intended to be gradual, rather than sudden. To ensure this is the case, staff is proposing high levels of free allocations to all industries deemed to have a significant level of exposure to carbon costs,” according to the program proposal.

Utilities would get the permits free and should use them to reduce the costs of AB32 on their customers by auctioning them, according to the proposed rules. Electricity producers, on the other hand, would not get free permits, so they should become active buyers of permits.

AB32, as many of you know, is basically up for a vote tomorrow. Prop. 23 aims to suspend implementing the law, contending that AB32 will have a major negative impact on the state’s economy. It’s facing stiff opposition from many companies and investors who could profit from the climate change legislation (and who might oppose it on ideological grounds). Opponents certainly have raised far more money than the proposition’s supporters, indicating that the ballot measure is unlikely to pass.

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Photo courtesy of Russell Neches