With almost four months between now and the first carbon allowance auction, questions remain about the feasibility and economic impact of California’s Cap-and-Trade program. While the legal question has been resolved, some commentators have been critical about the consequences of California’s environmental policy path.
The California First District Court of Appeals case AIR v. CARB sheds light on recent legal attempts to derail California’s Cap-and-Trade regulations passed under California’s Global Warming Solutions Act, AB 32. As part of the AB 32 Scoping plan, Cap-and-Trade sets government mandated limits, “caps”, on major sources of greenhouse gas emissions from refineries, power plants, industrial facilities, and transportation fuels. The goal of the “cap” is to reduce greenhouse gas emissions to 1990 levels by the year 2020 by incrementally lowering the total amount of green house gases allowed to be emitted. The “Trade” aspect of the program refers to swapping allowances between participants that emit greenhouse gases. If a particular entity’s operations are over its allowances, that facility may buy or trade for extra allowances to increase its limit.
Legal challenges are not the only way opponents resist California’s institution of Cap-and-Trade program. Western States Petroleum Association (WSPA), in combination with Boston Consulting Group (BCG), recently published a study challenging the science and economic repercussions that this policy creates. In a letter to California Governor Jerry Brown, Catherine Reheis-Boyd, President of the WSPA stated, “[t]he current fuels policies will have significant unintended consequences on California’s refiners, and consequently their employees, consumers and the state.” Brad Van Tassel, Senior Partner and lead researcher for the study, also commented, “California’s [Cap and Trade] policies pose some really impossible challenges for refiners in California that have the potential to disrupt fuel markets and fuel supplies in very serious ways.”
An example of these fuel market disruptions would be the institution of Carbon Intensity Reductions within the AB 32 Low Carbon Fuel Standard (LCFS) that requires facilities to use lower carbon intensity fuels. This mandate creates a 1% reduction in Carbon Intensity by 2013; a 5% reduction by 2017; and a 10% reduction by 2020.
The problem for fuel markets is that only cellulosic ethanol and Brazilian cane ethanol have low enough Carbon Intensities to materially reduce the Carbon Intensity of existing fuels. But cellulosic ethanol cannot be produced in sufficient commercial quantities with today’s technology, and Brazil does not produce enough cane ethanol to meet California’s demand at the specified CI, even if all of it were sent to California. This scenario would require 150% of the current supply of ethanol fuel from Brazil and could possibly stress fuel supply if there is high demand. Others have brought up concerns about the potential for market manipulation, non-compliance, and fraud; as has happened to California before with the electricity markets in 2000-2001.
Despite these concerns, California policy makers have not changed their minds with respect to Cap-and-Trade’s pending institution. Whether it is a belief in California’s capacity to adapt to certain market stressors or the inability to reverse the charted course, none can say for certain. What is certain is that California is heading into uncharted territory, and as in all transitional periods of policy, certain set backs are to be expected. The question then is how many of these set backs are Californians willing to endure in order to preserve California’s environmental image and the benefits of Cap-and-Trade.