Energy Exchange

With only two and a half months remaining until North America’s largest carbon market goes “live,” it’s no surprise that economic experts from around the nation are standing up and voicing support for California’s program. Just last weekend, 56 economists from both in-state and out-of-state academic institutions, and some NGOs, sent a letter to Governor Brown commending him for his leadership and recommending the state move forward with the planned auction component of cap-and-trade.

The Air Resources Board’s currently adopted regulation distributes most allowances for free, but does auction some as well, thus taking into consideration the needs of both California consumers and California businesses. In the first two years of the program, businesses will receive approximately 90% of allowances for free. After that, the amount auctioned increases, though CARB has committed to continuing to study this option to protect businesses from foreign competition.

In the letter, economists from 34 different colleges and universities, along with several from NGOs and think tank organizations, reiterated an important point: regardless of whether emissions permits are sold or given away for free, regulated businesses are likely going to pass through costs and change the price of the products they sell. And, while it might be appropriate to give some allowances away to protect businesses from foreign competition, polluters should not be able to profit from the program without making real reductions. It’s also important, the economists noted, to preserve the state’s ability to put the revenue to beneficial use cutting climate change pollution.

The legislature, the governor’s office, and many stakeholders, including EDF, have been considering what beneficial uses of proceeds from the allowance auction might look like. EDF’s report Invest to Grow covers this subject in detail.

State law already requires that the money from the auction be spent in ways that further the purpose of AB 32 – cutting climate change pollution – and there are many opportunities within that constraint. Further, the budget passed by the Legislature and signed by the governor in July calls for a large portion of proceeds to relieve pressure on the state’s much strained budget. Several other bills are also being considered in this final week of the legislative session that aim to address priorities and guidelines for auction revenue investments.

EDF will continue to explore the win-win opportunities that auction proceeds creates in more depth with a series of upcoming blog posts.

Yesterday, EDF filed a legal brief to help defend a core component of California’s landmark cap-and-trade program. Similar briefs were also filed by other environmental, non-profit, and business groups. These briefs, filed to the San Francisco Superior Court – (Case number 519554), support the California Air Resources Board’s (CARB’s) decision to allow pollution reductions achieved by verified, voluntary projects — known as offsets – to count under the program. The suit, first filed in March, seeks to prevent California’s program from harnessing these projects.

Here’s our perspective:

Offsets present an important opportunity to support environmentally beneficial projects throughout California’s economy. Offsets help to incentivize projects that reduce pollution in sectors – such as agriculture – that are not covered by the state’s cap-and-trade program. Under current rules, a variety of projects – including projects to grow and maintain urban forests in the metropolitan LA area, to capture greenhouse gas pollution from animal waste lagoons in the Central Valley, and to manage forests in Northern California – may be eligible to receive tradable carbon permits. Those permits can then be sold to power plants and other companies that are required to reduce pollution under the state’s cap-and-trade program.

CARB has adopted a stringent, category-specific approach to ensure measurable pollution reductions. Not just any old offset project can qualify for carbon credits under the program. Only projects that are developed according to pre-approved protocols adopted by CARB and that meet stringent accounting, verification and longevity standards can earn credits. These stringent requirements ensure that only verified projects representing real emissions reductions in specific project areas can receive credits that can be sold into the cap-and-trade program.

Over the past two years, EDF, along with other groups, has been working to introduce new types of projects that can sell credits into the program, as long as they meet CARB’s stringent criteria. Three such types of projects include: projects to reduce pollution from agricultural operations in California’s rice farming industry; projects to upgrade equipment in oil fields; and projects that ensure efficient use of fertilizers throughout the agricultural sector. All of these projects can lead to significant greenhouse gas reductions across the state.

California has a long way to go before meeting its ambitious climate change targets. Offsets present one important opportunity to realize that goal because of the incentive for new projects and ideas to be developed throughout the state. Our brief in the California Superior Court filed yesterday is but one part – albeit an important part – of the effort to ensure innovative project developers can participate in California’s long-term transition to a lower carbon economy.

The only surprise about the new report released today by the Western States Petroleum Association is what it doesn’t come right out and say: that the oil industry is pretty sure that those of us who believe climate change is one of the biggest issues facing California today are actually conspiring to put them out of business.

The report, “Understanding the Impact of AB 32,” is based on public data but was processed through the Boston Consulting Group’s proprietary modeling using the industry’s assumptions about the future. It reads less like an actual analysis of the potential impacts of California’s landmark climate law, and more like a laundry list of “woe is me” excuses for the oil refinery industry – not incidentally, the industry that paid for the report – claims that California’s innovative clean fuels policies will ruin their businesses.

The biggest problem with the report is its assumption that no one – none of California’s myriad economic sectors – will make changes aimed at reducing our dependence on oil, or at curbing dangerous greenhouse gas emissions. For example, even as refineries face falling demand for gasoline, in California and across the nation, this report implicitly assumes that refineries won’t adopt more efficient technologies, or change their volume of production in response to reduced demand.

In fact, the idea that California’s refineries would fail to do a brisk business in California, even under AB 32, is a load of hooey. California still represents one of the biggest and most lucrative markets for gasoline. And yet a significant amount of the fuel produced in California is currently shipped out of state, which certainly provides a substantial cushion for any reduction in local demand.

What California’s refineries should be focused on is how to become a leader in this new clean fuel economy. Low carbon fuel is going to be the fuel of the future, in high demand not only in the U.S. but abroad. By focusing now on making the changes needed to produce this kind of fuel, California’s refineries could get a jump start on this growing market – instead of bemoaning the slowing demand for their existing, outdated fuels.

There’s a reason they’re called fossil fuels, after all.

By Tim O’Connor and Jamie Fine Ph.D.

EDF first highlighted California’s coal shadow, which is the impact of coal-produced power sold into the state, in this 2005 report. At that time, the global warming pollution emanating from these out-of-state smokestacks was equivalent to the emissions from more than 11 million cars, canceling out projected reductions from California’s landmark standards for motor vehicles and its 20% renewable portfolio standard.

This week, the state Department of Water Resources (DWR) took a huge step toward ending our coal shadow when it renewed its commitments to stop purchasing power from the Reid Gardner power plant in Nevada starting in 2013. This critical step, the second major commitment in the past three months that will help California shed its demand for imported coal fired generation, is a strong signal that California global warming policies are working and that a full end of our coal shadow may be in sight.

In July 1983, DWR entered into a 30 year contract with Reid Gardner to import up to 235 MW from one of the plant’s four units to power part of the State Water Project. The project is the largest single consumer of electricity in California and pumps water up and down our state for residential, industrial and agricultural operations. The coal-fired energy from Reid Gardner has accounted for 30-50% of DWR’s annual global warming pollution, while only accounting for 10-15% of the project’s overall energy supply. This means that Reid Gardner is dirtier and less efficient than California’s other sources of energy.

The Reid Gardner decision, coupled with the CPUC’s sale of their interest in Four Corners in March 2012, is a clear indication that California continues to stand at the forefront of environmental responsibility and seeks to protect its citizens from harmful pollution and reliance on inefficient energy development. Our recently-enacted 33% renewable standard, the 2006 emissions performance standard for power plants, and the soon-to-be-launched cap-and-trade program for major polluters are but three of the landmark policies that are driving this fundamental shift toward cleaner sources of energy that will create jobs while improving air quality and protecting public health.

Late yesterday, a three-judge panel in the 9^th Circuit Court of Appeals granted an important stay motion in favor of California and its Low Carbon Fuel Standard (LCFS). The court’s decision allows the state to move forward with vital protections for human health and the environment that will strengthen California’s clean energy economy and improve our energy security.

The LCFS is one of California’s most ambitious and innovative climate change regulations to date. It is among 70 measures adopted under AB 32 (the Global Warming Solutions Act of 2006) that will be used to reduce emissions to 1990 levels by 2020. The standard calls for reducing the carbon content of fuels by 10 percent by 2020, which is expected to reduce 15 million metric tons of greenhouse gas pollution per year by 2020. Some of the cuts will come from improvements in the way traditional oil and ethanol feedstocks are produced, processed and delivered to consumers. Other cuts will come from advancements in breakthrough technologies such as electric cars and renewable fuels that dramatically cut toxic air contaminants and further diversify our fuel supply with locally generated energy sources.

How LCFS Works

The standard creates a flexible system that allows fuel suppliers to comply by either documenting reduced emissions in their fuel production pathways (using a science-based lifecycle emissions model) or by purchasing credits from suppliers that have reduced emissions below a predetermined threshold. This approach rewards innovative solutions that cut emissions as quickly, cheaply and extensively as possible, using a scientifically credible emissions reporting and trading platform.

How LCFS Provides Energy Security and Protection from Fuel Price Surges

California drivers burn about 16 billion gallons of gasoline and 4 billion gallons of diesel fuel every year and emit, in aggregate, approximately 170 million tons of greenhouse gas emissions. Much of this fuel is sourced from California oil fields (approximately 200 million barrels per year), though more than 50 percent is imported from the Middle East, South America and Alaska. These imports make our economy vulnerable to price swings and shortages driven by production changes and politics.

We blogged yesterday about the latest Next 10 report that analyzes the economic impacts of policies designed to help California reduce its climate pollution. It notes California’s record-breaking pace on clean energy funding and innovation, while reducing pollution and growing its economy. Since 1990, California’s gross domestic product (GDP) expanded 16 percent while carbon emissions per capita fell.

Today, a new report released by Environment America finds that the 10 Northeastern states in the Regional Greenhouse Gas Initiative (RGGI) have seen similar results. The states cut per capita carbon emissions 20 percent faster than the rest of the nation from 2000-2009 while regional per capital GDP grew 87 percent faster.

Add this good news to the findings of a report released last November—which estimated that investments made by RGGI states in its first three years of operation added economic value worth more than $1.6 billion (nearly $33 per person) and 16,000 jobs—and you have further proof that strong environmental policies deliver economic benefits to states that lead on climate change. That is worth celebrating on Earth Day.