CARB Economics
California took steps to demonstrate its environmental mojo once again releasing draft regulations to reduce California’s carbon dioxide and other greenhouse gas emissions to 1990 levels by 2020.
The 135-page draft regulation by the California Air Resources Board [1]sets a declining ceiling on greenhouse gas emissions and permits emitters to buy and sell permits to achieve the targets. CARB scheduled the draft rules for public comment and revision saying it plans to adopt final rules by December 2010.
The rulemaking is required under California’s AB32 Global Warming Solutions Act which initially targets the 600 largest sources of greenhouse gas emissions such as electric power plants, refineries and concrete plants. After 2015, the emissions reduction requirements also will apply to other industrial emitters and transportation fuels.
The CARB draft rules go farter, faster than the RGGI rules adopted for the northeastern U.S. states regional trading system which focused on carbon dioxide emissions by big emitters. California plans to include almost every source of emissions to reach its goal.
Negotiating the Scope of the Final Rules
As expected California businesses complain the plan goes too far too fast, and will cost too much. A state advisory panel is at work revising the cost estimates for the AB32 compliance rules including questions about providing allowance support to ease business into the program and moderate costs. But those recommendations are not due until 2010. Make no mistake this will be costly and those costs will be layered on top of electric utility rates already spiking because of California’s ambitious renewable energy portfolio standards, costs for adding smart metering and other regulatory drivers.
While California voters generally favor environmental clean up strategies they are only beginning to feel the cost consequences of these new rules and programs even as the brunt of the recession still bears down on them. There is a risk of voter and ratepayer backlash and politicians are becoming more cautious, but the die is cast in California and the practical result is that voters are more likely to take it out on incumbents at the next election than roll back the rules.
The draft rules CARB released November 24 2009 avoided several very tough issues yet to be resolved—will power companies and other large emitters get free allowances and if they must pay, how much will they be required to use an auction of credits to cover their emissions requirements. Remember, Waxman-Markey sought to buy support by giving away large number of emissions allowances. California emitters have learned that lesson and also want allowances given at little or no cost up front in any final rules regime adopted. Doing so may mitigate some objections but it also undermines the effectiveness of the rules and delays their desired results beyond the 2020 target date.
How Much Will This Cost?
CARB Chair Mary Nichols said she expected the cost of an allowance for a ton of carbon dioxide initially should be around $10 based on how other programs operated. That is about half the current European price. While a low allowance price will ease some of the concerns of emitters and the business community, a low allowance price will not be enough to change behaviors enough to achieve emissions goals California set in AB32.
Put that in perspective, in the most recent auction of emission allowances in the ten Northeastern states which are part of the Regional Greenhouse Gas Initiative (RGGI) the clearing price for the roughly 31 million CO2 emissions allowances that were just sold dropped in the latest auction for the 2009 vintage to $3.23 per allowance. The RGGI auction for the second three-year control period beginning Jan. 1, 2012 saw 2.2 million allowances go for the 2012 vintage cleared at $2.06 per allowance.
So California officials expect their emissions reduction strategy to cost more—much more than the one in place in RGGI. But state regulators responsible for implementing the 33% RPS standard are already saying the cost of that program will be significantly more. So it is reasonable to assume that layering AB32 compliance on top of the 33% RPS targets will result in substantial rate increases.
Can California Make this Work?
The California Public Utilities Commission (CPUC) said achieving the 33% RPS goal will take until 2024 not 2020, and cost as much as $12 billion more in new transmission lines just in California to get such large scale renewable energy to market. It will also raise utility rates even higher than the 16.7% rate increase required to achieve the current 20% renewable portfolio standard by 2020; and may not be cost effective because natural gas prices would have to be higher than $13.87/MMBtu and any proposed CO2 tax would have to be higher than $100 per ton for renewable energy to be an effective hedge against fossil fuel prices from today’s typical utility portfolio. [2]
Achieving the 33% RPS goal is a condition precedent to implementing the AB 32 emissions reduction goal. The BIG RISK facing California’s breathtaking push forward on these dual goals of expanding the use of clean and renewable energy while reducing greenhouse gas emissions is that it will take longer, cost more—MUCH MORE—and may not work to change behaviors sufficiently to be sustainable over the long term unless the prices set are higher than most of us will find affordable or tolerable.
[1] http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm
[2] http://www.cpuc.ca.gov/PUC/energy/Renewables/hot/33implementation.htm
California Politicians Paycheck Payback
You will love this story.
Salaries for California state elected officials are set by a, more or less, independent California Citizens Compensation Commission, just one of the scores of appointed boards and commissions which serve as waysides for other politicians in transition. This commission is a little different. The Governor appoints members to seven seats by categories: small business, non-profit public interest organization, general population, labor (two seats, of course), compensation expert, and major corporation executive. Commission members serve six-year terms.
In populist California the Pay Commission was created through the initiative process (how else!) because citizens were fed up with state legislators raising their own salaries, giving themselves all state car allowances and boosting their per diem so they can be wined and dined at Sacramento’s many fine restaurants without having to spend their own money on it.
Proposition 112, passed by voters in June 1990, required the Commission to set the salaries and medical, dental, insurance and other similar benefits of Members of the Legislature and the State’s other elected officials.
Proposition 1F, passed by voters in May 2009, prevents the Commission from increasing elected officials’ salaries during budget deficit years.
So fast forward, after Prop 1F was passed the Pay Commission got the message that the voters were surly. California faces a major budget deficit and many of the special interest groups were also squealing that their programs are being cut in the Govenator’s proposed budget. So in May 2009, shortly after the Prop 1F ballot measured passed the Pay Commission ordered the salaries of State Legislators and all state elected officials to be cut by 18 percent. A scramble ensued at the State Capitol about whether they could actually do that!!! EeeGads!
Politicians seeking cover on the issue sent their administrative staff from Senate Rules and Assembly Rules committees to the front lines asking Attorney General Jerry Brown whether the Commission could cut salaries (PLEASE, Jerry, save us!) and whether any cuts approved would have to wait until the next Legislative Session (December 2010) to be effective ( or at least buy us time and wiggle room!) .
But Attorney General Brown is running for Governor so—surprise, surprise last week he issued a legal opinion asserting that, of course, state officials’ pay can be cut and the Commission can do so in the middle of their elected terms.
So on December 7th (Pear Harbor Day—how fitting) the state will cut the pay of all 120 lawmakers and nine constitutional officers, including candidate Jerry Brown, now Mr. Fiscal Conservative instead of former Governor Moonbeam, a year earlier than expected, saving the state $2.8 million next year.
The Pay Commission Chairman Chuck Murray was surprised by Brown’s action telling the press there had been no discussion of implementing the pay cuts midterm since the Commission didn’t want a fight with the Legislature.
In addition to their salary, now reduced from $116k to $95k, California lawmakers get $173 for each day they are in Sacramento (so, of course, they always are!), and up to $400 a month for automobile leases, as well as state contributions for health benefits. The Pay Commissions order also whacks all of these benefits by 18 percent next month along with the pay cuts save the state another $1.2 million next year.
Let’s hear it for Populism in action!
