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November 29, 2012

Head to Head: Is cap-and-trade auction a step forward?

The Issue: California held its first cap-and-trade auction Nov. 14 as part of the state's effort to reduce greenhouse gas emissions to 1990 levels by 2020. More than 70 companies submitted bids for more than three times the 23million credits available for 2013. For the first time, the state has a market price on carbon of $10.09 per metric ton.

Pia Lopez: Yes, it's progress

Rather than impose a "carbon tax" on emissions, California has chosen the market approach of cap and trade, because it sets clear goals for emissions reductions. It also allows companies to decide for themselves when it is more cost-efficient to invest in new pollution controls – or to buy credits from others that reduce emissions below their limits.

The aim of cap and trade is not – contrary to what some mistakenly believe – to raise money for the state to solve its budget problems.

By design, if companies choose to buy credits, the money goes to a Greenhouse Gas Reduction Fund that may be used only to reduce harm from emissions.

The auction of 23.1 million allowances for 2013 came from utilities. At $10.09 per metric ton, that raised $233 million. These proceeds must be used for the benefit of ratepayers. For example, the California Public Utilities Commission, which votes Dec. 20, has proposed that 85 percent go directly to residential, small business and emissions-intensive businesses facing competition from out-of-state companies. The average residential customer would get a $30 rebate twice a year.

The balance would go to energy efficiency programs. That is as it should be.

The auction also sold 5.5 million of 39.5 million advance allowances for 2015. At $10 per metric ton, that raised $55 million. That money has to go to energy efficiency, clean and renewable energy generation, transmission and storage, and projects in disadvantaged areas disproportionately affected by pollution. The funds have to be appropriated by the Legislature, a key check.

The state will hold four auctions a year – in February, May, August and November. The first phase, through 2014, includes electric utilities and large industries. The second phase expands to fuel distributors, starting in 2015. All told, cap and trade will affect 600 facilities, owned by 350 firms.

Over time, the cap on emissions gets tighter and the floor price for allowances goes up. Facilities have been reporting emissions the past four years. They know how many allowances they have been given, and how many they will need to acquire based on their emissions. They will be closely watching the price of allowances in the marketplace.

In this way, they can make informed decisions about how and in what way to reduce their emissions – from new technologies to cleaner fuels to more efficient production.

California, the ninth-largest economy in the world, for the first time is putting a price on carbon; no longer is it zero. That is major progress.

Ben Boychuk: No, it's backward

If the aim of cap and trade is, as Pia observes, not to help the state solve its budget problem, then somebody ought to tell Gov. Jerry Brown and his friends in the Legislature. They didn't get the memo.

Or maybe they got the wrong one?

When lawmakers heard Air Resources Board Chairwoman Mary Nichols tout "green programs," perhaps they thought "green" meant "money." The current budget assumed $1 billion in revenue from the first year of cap-and-trade auctions. Roughly half of the money was supposed to be set aside for deficit reduction.

The Legislative Analyst's Office ruined some politicians' Thanksgiving dinners last week when news broke that the state would likely take in just $191 million from cap and trade during the program's first year.

The upshot? "The likelihood of there being a hole in the budget has increased," analyst Tiffany Roberts told The Bee.

The good news? The deficit will probably only be $1.9 billion or so.

And yet so many green dreams, crushed. Brown himself imagined the robust sale of carbon credits would fund his beloved $68 billion bullet train. I don't believe for a moment the train will cost only $68 billion, assuming it ever gets built. But that's the figure the High-Speed Rail Authority is touting, so let's pretend for now that it's a real number.

"We do have other sources of money" for the rail line, the governor assured an interviewer in January. "For example, cap and trade will be a source of funding going forward for the high-speed rail."

Will it now? Legislative Analyst Mac Taylor stomped all over Brown's categorical claim last week.

After pointing out that high-speed rail construction will generate tons of carbon, Taylor pointed out, "It's a little hard for us to justify how you can use huge sums of money to pay the large capital costs when (cutting emissions is) a relatively small reason of why you're doing it."

Truth is, cap and trade has been a boondoggle everywhere it's been tried. Europe's cap-and-trade market, to which California's aspires, has resulted in higher taxes and prices while marginally cutting emissions. Where emissions have fallen, economies have suffered.

Just because regulators concoct an elaborate system of price caps and controls, then slap the word "market" on it, doesn't make it so. Carbon dioxide isn't an ordinary commodity, and California's program has already been subject to heavy industry lobbying – exactly what happened in Europe.

Call that what you like, but don't call it progress.

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