Green Biz Crowd says AB32 will send California over the Cliff
The California Air Resources Board (CARB) adopted its first round of rules to implement AB32 this month. While the rules do not kick in until 2012 and most of the “allowances” required to emit greenhouse gases will be given away until 2015 it still is cause for celebration or alarm in the Golden State and elsewhere.
RenewableBiz is part of the green press crowd that closely follows the renewable energy market. It is doing a quick poll of its readers running from December 19th to January 1st recently asking:
Which statement most closely resembles your view of California’s adoption of a cap-and-trade system for CO2 emissions?
A boom in the clean energy economy has been started24% (9 votes as of 12/13/2010)California’s economy will be driven off a cliff43% (16 votes as of 12/23/2010)
The state will muddle along like much of the rest of the country32% (12 votes as of 12/23/2010)
Reading the Energy TEA Leaves after the Election
While the results of the 2010 midterm elections are still be digested, the impact on the energy industry seems likely to be net positive if you believe in a balanced energy future that includes using more of America’s domestic energy potential. If you are the American Wind Energy Association you probably are still drinking to ease your pain. This gallows humor is meant to suggest that the GOP and TEA Party view that America should have a well rounded, domestic product focused energy strategy is likely to move forward in search for common ground with the Democrat view of climate change action and renewable energy.
From RES to CES. The panel said that AWEA’s push for a national renewable energy standard (RES) had little chance of passing but a modified clean energy standard (CES) that included tax support for building new nuclear power plants and investing in clean coal technology along with continued tax credits and loan guarantees for renewable energy might find common ground. As you can imagine adding tax supported competition for new baseload generation from zero emission nuclear power and low emissions from clean coal carbon capture and sequestration was not what the wind boys wanted to hear on top of their other problem competing with China. But that is where they are like it or not so the debate is shifting toward finding a compromise number higher than the 15% RES proposed by AWEA but allowing nuke and clean coal to count. Unless you raise the target it becomes a zero-sum game with the larger baseload plants swamping the smaller wind and solar plants. Do I hear 33% anybody?
Waxman-Markey is Dead and AB32 Got a Stay of Execution. It seems clear that hell will freeze over before any kind of carbon tax bill makes it out of Congress. Even the president admitted this was dead until at least after the next Presidential election. Even in California where voters rejected Proposition 23 to suspend AB32 the California Global Warming Solutions Act those same voters approved Proposition 26 which reclassified administrative fees and impact fees just like CARB expects to impose to tax carbon releases under AB32 as a “tax” and thus requires a 2/3 vote of the Legislature or voter approval. Carbon taxes are going to be radioactive in this new political environment.
New Nukes. It is time to step up the nuclear licensing, standards and regulatory approval process for new standard technologies for smaller scale, safe nuclear power plants. We should create a competitive market among the major architect-engineers and take advantage of the construction experience in other countries while America has been on the nuke sidelines to accelerate our go-to-market strategies. America needs more baseload power for the future and now is the time to build the next generation of nukes to expand the current fleet and progressively replace the oldest units. And we need to do this BEFORE inflation eats our lunch and sends us déjà vu into the same death spiral cost overrun conditions that hurt the first generation nuclear units.
Drill Baby Drill. Domestic oil and gas production won new champions in this election in the belief that America should produce more of its own energy book and put its best technology to work to do so efficiently, cleanly and effectively. Horizontal drilling and hydraulic fracturing are America’s current technology wonder of the world and we should use to our own advantage. States like New York and Pennsylvania that seek to restrict the use of these technologies in the Marcellus shale risk being left behind with higher price energy costs and lower tax revenues.
Will Clean Coal still be King? The technology risk associated with carbon capture and sequestration and other clean coal technologies make them very costly and commercially un-viable today. More R&D is needed to unlock that potential and drive down the cost. There is a role for the government in encouraging and supporting such R&D efforts but the coal industry must now step up and spend more of its own money to extend its useful life. Similarly, creating a market for the captured carbon and turning it into useful CO2 gathering products makes perfect sense and also need to be supported. Meanwhile, add scrubbers and other pollution control equipment to the current units and mitigate their negative impacts.
EPA and New Rules for Regulatory Accountability. A likely scenario to a wounded President unable to get his energy and environmental agenda through a disbelieving Congress is to use his executive authority to regulate everything that moves in the energy industry through the US EPA and other Federal agencies. The new Republican majority in the House will need to guard against this over-reach. And the TEA party members will probably welcome one more revolutionary idea—all Federal regulations must reasonably balance policy objectives intended with the public and economic interests of the nation and be submitted to Congress for an up or down vote. Give Congress 90 days from submittal to act or the rules go into effect but force legislative accountability for regulatory actions. Also sunset every regulation at least every ten years so we have to rethink this stuff periodically. If the goal is to control the size and reach of government and force it to balance interests reasonably the Congress must fix the problem of regulatory free will.
There ends the rant!
California’s Achilles Heel: The High Cost to Do Business
The High Cost of Doing Business also Kills Green Jobs
Did you read the op-ed by TJ Rogers in the WSJ today? He describes the real choice we have here in California and elsewhere between growth and the environment. It’s not a throw the baby out so we can keep the bath water lesson. That is improving environmental quality does not have to destroy jobs. But that is often the unintended consequence of the cumulative impact of rules and regulations that seem reasonable at the moment but haunt us over time.
California is an example of both extremes at work. Some of the early environmental policy decisions made in California involved establishing energy efficiency standards on a wide range of products sold in the state. Yes manufacturers opposed such unilateral actions, but California lived into it best traditions as laboratory and trendsetter in focusing on reducing wasteful energy use. Today the energy intensity in California of about 50% of the national average and the size of the California consumer market meant that manufacturers could do well by doing good by adopting the California efficiency standards for the products sold across the United States.
Similarly, setting renewable energy portfolio standards requiring utilities to get 20% of energy consumed from clean, renewable sources indeed jump started the market for wind and solar energy and a range of other technologies and California utilities are closing in on the 20% targets.
But TJ Rogers talks about his company’s acquisition of money losing Sun Power and how the decision needed to save the company from bankruptcy and return it to profitability meant moving the solar panel production from increasingly high cost California to lower cost Malaysia while growing its sales and customer service functions in the California market. Eventually, he said 4000 jobs went to Malaysia while 800 new jobs were created in California.
Over time the cost of doing business in California is having impacts that even threaten our environmental goals. While we still generate ideas and our venture capital in Silicon Valley builds new companies and new products they can’t afford to build them here and thus our high cost status deprives us of the job creating benefits of that cleantech investment as R&D turns into manufacturing.
Proposition 23 on next week’s ballot would suspend AB32 the California Global Warming Solutions Act until unemployment in the state is below 5.5% for four consecutive quarters. As I write this the polls suggest that California voters are likely to vote the proposition down. Doing so will not improve the odds that California will achieve its greenhouse gas emission reduction targets but it may cost the state as many as 1.1 million jobs as business shifts its manufacturing and other operations out of state. Even if California held its GHG emissions steady at it 0.36 gigaton 1990 levels (the target for 202 under AB32) TJ Rogers described the impact as reducing the total US GHG emissions of 5.98 gigatons in 2007 to 5.94 gigatons. NONE of those emissions would actually go away they are just exported to other markets along with California jobs.
And that’s the lesson, when California policy makers stick to environmental strategies that encourage real changes in energy intensity and use that is lasting we can have a profoundly positive environmental impact within the state and well beyond our borders. But when those policies are a zero-sum game that induces business to go elsewhere California forfeits both its environmental leadership and its economic growth and standard of living.
So pay attention to how California voters decide three propositions on the ballot: Prop 23 on suspends the Global Warming carbon tax, Proposition 24 adds $1.3 billion in new taxes on business by eliminating investment tax credits on new plant and equipment for business growth and Proposition 25 reduces the legislative votes required to pass a budget from 2/3 to a simple majority.
The Tax Foundation called California the second worst business tax climate of the 50 states after New York but it will displace New York as the worst depending upon how voters act.
Peering into the Energy Future: Signposts & Setbacks
This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here.[1] But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011. [2] So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
[1] http://www.propublica.org/ion/stimulus/item/stimulus-spending-fails-to-follow-unemployment-poverty-805
Western Climate Initiative Goes Bust!
The Western Climate Initiative partners meeting is being held March 3rd in Vancouver BC, but there won’t be much cheering in the stands after Arizona Governor Jan Brewer issued an executive order officially pulling Arizona’s commitment to reduce greenhouse gas emissions to reduce emissions to 15 percent below 2005 levels by 2020 as part of the cap-and-trade approach the Western States and Provinces agreed to in 2008. [1]
Back then the Federal Government under President Bush resisted action on cap and trade and WCI was seen as a politically correct strategy for encouraging collaborative action along the lines the Northeastern States had taken earlier in forming RGGI—the Regional Greenhouse Gas Initiative. Fast forward to the November 2008 election of Barack Obama and the Feds shifted their strategy and Waxman-Markey Cap and Trade legislation began rolling as a prelude to the main event which was to be a new global treaty at Copenhagen’s COP15-fest.
We’re Behind You California—Way Behind You!
That is the headline to the story of the WCI today, but despite having ten remaining WCI members only the Golden State—now out of gold—is the only one of the WGI partners actually moving forward. In November 2009, the California Air Resources Board issued a preliminary draft regulation for its AB32 Global Warming Solutions Act implementation. [2]
The recession has had a sobering effect on all these partners and was the official reason for Governor Brewer’s executive order in Arizona. She said the cap and trade program would “devastate Arizona’s economy” and instead the state would use nuclear, solar and other renewable energy sources. But that was true before the recession except Janet Napolitano was Governor then moved on to be Homeland Security Secretary to President Obama.
Indeed, there was an embarrassing dust up recently when one Arizona legislator filed a bill to reclassify energy from the Palo Verde nuclear plant toward meeting the State’s renewable portfolio standard goals thus effectively ending the program by achieving its goal. While the bill was later withdrawn after howls of protest by the solar lobby the point had been made.
The problem for California is that it is now committed to implement AB32 by law. But the cold reality of achieving the policy objectives of AB32 will require natural gas prices of $13.87 per mmbtu and a carbon tax of $100 per tonne in order for the cap and trade program envisioned to be effective in changing behaviors enough to actually achieve the goals according to the CPUC and the CEC—the state agencies responsible for implementing it. And we’ll need to invest billions in new transmission lines to bring all that clean and renewable energy from Arizona to the Golden State—only one problem, we don’t have any gold to pay for it.
[1] http://www.azgovernor.gov/dms/upload/EO_2010_06.pdf
Factors Shaping the Smart Grid End Game
There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy. They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.
Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management. And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected. It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.
The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology. And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.
So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?
Signposts of the Smart Grid End Game Taking Shape?
- Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”. They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns. Just like Al Gore, these players looked for ways to make money on our fears and pain points. Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous. More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas. Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley. But now it’s time to put lipstick on this pig and flip it. So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones. This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
- Risks for Smart Grid Investor are Rising. The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines. Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system. Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand. Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future. As a result we get all the embedding costs of adding smart meters and none of the benefits. Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates. Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
- Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it. The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators. But it is too late. The costs of years of procurement of cleaner, but more expensive renewable energy is coming due. The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates. In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover. In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance. In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs. It’s getting ugly out there in ratepayer city—and the worse is still to come.
- We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape. In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies. The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting. The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases. The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law. Even in California we have limits.
- Settled Science is, perhaps, Not So Settled after all. The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions. The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course. I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost. Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy. And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.
So what?
So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time. Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions. Subsidies and stimulus will give way to economic rationalism once again. The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.
Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing. And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use. Look around you, it is already at work.
Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?” It’s here today. Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.
Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!
The Global Warming Sting: California Balances its Budget and Saves the World
The sting was revealed but the hook is not yet set by the January 11th exposure[1] of a “dispute” among the 16 member California Economic Allocation Advisory Committee (EAAC) whose purpose is to figure out how to spend the money from carbon taxes envisioned by AB32, the California Global Warming Solutions Act.
The Set Up
On January 11th the EAAC presented final allocation recommendations to the State. So this is a trial balloon to see how much angst this approach stirs among the politicians, special interest groups, and seeks to avoid enraging voters before the next election. By framing this “dispute” among members, the EAAC is setting up the potential for a sting of California consumers depending upon how the rest of the process plays out.
The timeline for the rest of this process is that a final public conference call will be held in February 2010 to adopt its economic impacts report. EAAC Chair Goulder will present both reports to the California Air Resources Board February 25th. In Fall of 2010 along with the final proposed cap and trade rules, the CARB staff is expected to recommend a final allocation approach which will purport to balance EAAC recommendations and public input. This is when the hook will be set if the political will exists to do so. There is the minor problem of the November 2010 election looming and voters in California as elsewhere are growing surly.
The committee imported a Harvard environmental economics professor, Robert Stavins, director of Harvard’s Environmental Economics program, to testify that the California approach complies with the AB 32 intent and that the proposed carbon taxes should not fall heaviest on poorer people. He opined that a cap-and-dividend approach produced fewer benefits than cutting taxes on labor and capital.
The much maligned Waxman-Markey Bill passed by the US House uses most of the proceeds from sales of emissions allowances to reduce power company costs of compliance by essentially awarding them free permits to reduce the expected spike in utility rates. This approach sidelined a number of major utilities who fatalistically decided to get the best deal they could rather than be painted as obstructionists. There is a Senate bill by Senators Boxer and Kerry which is closer to the approach being used in California, but it has gone nowhere as yet on Capitol Hill.
Placing the Hook
At its January 11th meeting, the CEAAC members endorsed a “cap-and-dividend” approach which would set prices for CO2 emission allowances as a tax on producers and then use the money raised as a “dividend” to consumers to help reduce their burden of paying all those higher prices for everything that uses energy. The discussion by staff presenting ideas to the committee suggested an annual energy “dividend” for a family of four might be about $1,000.
Sounds good, right?
Not so fast, the committee was divided on whether the best way to use this pot of gold at the end of the global warming rainbow was to give it back directly to consumers or instead use it to create “tax cuts” in state income taxes or sales taxes that will have to be raised to balance the state budget!
The timing was subtle but perfect. Waxman-Markey has stalled in Congress and COP15 turned into a food fight between developed and developing countries and resulted in egg on all their faces. So California with AB32 safely adopted has the opportunity to recapture the leadership flag and show the world how things are done in the Golden State.
Meanwhile, the State is facing another $22 billion deficit because of the recession thus the convenient convergence of the need to develop an implementation plan for AB32 and address the growing California budget deficit sets up the “the sting” that should earn the State an Oscar for best supporting actor in a political drama. Nothing tops the Federal Governments hubris for spending, taxation and income redistribution for Best Actor nominees this year.
Perfect Sting or Fatal Error?
So will California use Carbon Taxes to fill the hole in its state budget? The perfect cure it seems to state politicians. Will they save the world and save their behinds at the same time all while calling these new carbon allowance revenues “dividends” or using them to “reduce taxes” that they must raise rather than reduce spending to close the budget gap? Or will this fatal attraction and sleight of hand turn into a fatal error in the November 2010 elections. High stakes!
But I saved the best part for last, his vast income redistribution scheme would not require the Legislature to actually vote for any nasty tax increases since the California Air Resources Board would administratively each year set “carbon allowance fees” sufficient to raise the revenue needed to meet the Legislature’s spending desires and balance the budget and then the Legislature would declare a “dividend” to give a modest portion of the revenue back to consumers while taking credit for being fiscally responsible balancing the budget by keeping the lion’s share for budget spending. This has the added political benefit of reducing the hostage taking behavior over the need for a 2/3 vote to raise revenue or reduce expenditures each year in passing the state budget. The debate among the 16 members of the California Economic Allocation Advisory Committee is not really what to do but how little of the revenue must be given back to consumers.
[1] http://www.climatechange.ca.gov/eaac/meetings/index.html
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
