Energy Exchange

Like most legislative sessions in California’s recent history, the session that ended last Friday at midnight included a flurry of activity up until the final minute. For California’s AB 32 though, Friday’s closing moments were not just exciting, they were groundbreaking for climate policy.

After nearly 2 years of deliberation – the Legislature charted a clear path toward full implementation of the state’s landmark cap-and-trade regulation by resolving a contentious debate over whether and how to wisely invest the proceeds of the regulation’s permit auction. That debate, whether cap-and-trade should raise money in a greenhouse gas (GHG) permit auction process, was brought back to life when a letter from 56 prominent economists to Governor Brown urging him to not delay or scale back the auction was met with a similar letter from several state legislators taking the opposite position. Friday’s legislative action appears to have resolved that issue – meaning all signs are go for launch of the state’s comprehensive climate change regulation in November.

The legislature passed two bills, AB 1532 and SB 535, establishing a framework for deciding how to distribute the proceeds from the state’s upcoming auction of GHG permits. A core part of the approach, laid out in detail in AB 1532, is ensuring that all money raised in the auction be used to further the goals of the law (to reduce climate change pollution), and that spending decisions be made transparently, and in consultation with state agencies. SB 535 stipulates that some of the money must be used to the benefit of disadvantaged communities who already share the large brunt of California’s degraded air quality.

Though any legislative proposal is potentially subject to veto by the governor, EDF expects and is actively urging Governor Brown to sign both AB 1532 and SB 535 into law as quickly as possible.

By passing a comprehensive bill package that sets out how expenditure decisions are developed and made, and also ensuring that those decisions be in compliance with established legal standards, the legislature has put to rest the question over whether to move forward with the program as planned. Now, with AB1532 and SB535, the legislature has decided how to move forward with the program – giving a clear signal that cap-and-trade is intended to proceed in November 2012.

More detail on AB 1532, SB 535 and use of AB 32 auction proceeds:

AB 1532, sponsored by Assembly Speaker Perez, establishes a 3-year investment plan process for investing auction proceeds in projects that reduce GHGs through activities like renewable energy and energy efficiency, advanced vehicles, water and natural resource conservation, and waste reduction. These investments are scheduled to start in the 2013-14 fiscal year. The bill requires the investment plan be developed though a specified agency consultation process that includes public participation.

SB 535, sponsored by Senator De Leon, requires a minimum of 25% of CARB’s auction proceeds to be used in ways that benefit disadvantaged communities, either directly or indirectly. It also requires a minimum of 10% of auction proceeds directly fund projects within those communities.

Use of AB 32 auction proceeds – Wise investment of cap-and-trade auction proceeds can be an integral part of achieving these AB 32 emission reduction goals. As detailed in our June 2012 report, Invest to Grow, targeted investment of AB 32 proceeds can bolster California’s green energy economy, creating jobs and providing a new wave of customers to California businesses operating in sectors providing clean energy solutions. In addition, investment of auction proceeds into energy efficiency and clean energy will reduce air pollution, thereby improving health and air quality, fill gaps created by reduced state and federal funding, accelerate energy independence, and save businesses money by reducing energy demand.

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.