California's Cap-and-Trade regulations have not achieved the
mandated "maximum technologically feasible and cost-effective
greenhouse gas emissions reductions" in any meaningful sense, as
evidenced, for example, by the 310 million unused allowances in
circulation. Moreover, the regulations operate - by design - to
undermine and neutralize complementary action toward achieving
additional emissions reductions beyond CARB's minimal statutory
requirements. The first problem probably cannot be resolved within
the existing Cap-and-Trade regulatory framework, but the second
problem could have a straightforward remedy via implementation of
existing statutory mandates as outlined below.
The draft Scoping Plan encourages and relies upon complementary
actions by local jurisdictions, communities, and individuals to
achieve CARB's goals. Quoting from Chapter 5 (p. 228): "Only when
we add up the impacts of the choices we make do we understand the
true impact on GHG emissions. We can choose to drive a car, take a
bus, bike, or walk. We can choose to install a heat pump or buy an
electric cooktop. Together, we get to pick the future we want." But
what exactly is the "true impact" of such choices?
California utilities offer Green Power options, which ratepayers
purchase as a way of reducing their carbon footprint. These
programs require "Green-e" certification from the Center for
Resource Solutions [https://www.green-e.org/]. The FAQ page on the
Green-e website says "Purchasing renewables lowers the
purchaser’s carbon footprint, but may not reduce global
carbon emissions." This is a puzzling statement because reducing
one's carbon footprint, by definition, means reducing the
purchaser's contribution to global emissions. Why would switching
from fossil fuel to renewable electricity not marginally reduce
global emissions?
For California the answer is that CARB's Cap-and-Trade
regulations disallow individuals from influencing statewide
emissions from regulated sectors. Emissions from industries such as
electric power are regulated by the supply of emission allowances,
which is predetermined and controlled by CARB. Individual actions
such as purchasing Green Power do not influence the supply of
allowances or aggregate emissions in capped sectors. If an
individual reduces their carbon emissions by purchasing Green
Power, or by installing energy-efficient appliances or residential
PV, driving an EV, etc., then the allowances that would otherwise
have been used to cover that individual's emissions will instead be
used to allow increased emissions elsewhere. Actions to reduce
one's own emissions merely have the effect of subsidizing somebody
else's increased emissions; they have zero net impact on statewide
emissions. Cap-and-Trade gives a different meaning to "net
zero".
This nullifying effect of Cap-and-Trade is not a "bug"; it is a
"feature". That is how it is designed to work. As a policy
instrument, Cap-and-Trade is not intended and does not operate to
incentivize the "maximum technologically feasible and
cost-effective greenhouse gas emissions reductions"; its priority
objective is to achieve a predetermined emissions target at minimum
cost. The benefits of unanticipated market opportunities, whether
from economic conditions, technology advances, or local and
individual climate actions, are channeled toward reducing
compliance costs, not toward further reducing emissions.
Cap-and-Trade neutralizes the environmental benefit of all
complementary emission-reduction actions in regulated sectors. For
example, CARB's Greenhouse Gas Reduction Fund (GGRF), the
repository of Cap-and-Trade auction revenue, is reported to have
achieved 76 MMTCO2e cumulative carbon emissions reductions between
2015 and 2021.
[https://ww2.arb.ca.gov/sites/default/files/auction-proceeds/cci_annual_report_2022.pdf#page=29]
But to the extent that those reductions have been in capped sectors
they have probably been substantially nullified by increased
emissions elsewhere. Quoting from a 2017 report from the
Legislative Analyst's Office ("Cap-and-Trade Revenues: Strategies
to Promote Legislative Priorities"):
"Spending on Capped
Sources Likely Has No Net Effect on Overall Emissions. ... As long
as the cap is limiting emissions, subsidizing an emission reduction
from one capped source will simply free–up allowances for
other emitters to use. The end result is a change in the sources of
emissions, but no change in the overall level of emissions."
[https://lao.ca.gov/Publications/Report/3328]
A number of local jurisdictions in California, such as San Diego
and Santa Clara counties, have initiated Climate Action Plans
(CAPs) with ambitious decarbonization goals exceeding state
mandates, e.g., net zero by 2035. The draft Scoping Plan says
"California encourages local jurisdictions to take ambitious,
coordinated climate action at the community scale; action that is
consistent with, and supportive of, the state’s climate
goals" (p. 218). These actions are generally intended and expected
to help reduce statewide and global GHG emissions. But
Cap-and-Trade operates to nullify the environmental benefit of such
actions, as explained in a publication authored by the Chair of the
Independent Emissions Market Advisory Committee (2017 RFF report by
Burtraw et al., "Expanding the Toolkit: The Potential Role for an
Emissions Containment Reserve in RGGI"). This explanation pertains
to RGGI but is equally applicable to California:
p 4
"Additional actions may be taken by cities, states, companies, or
individuals to reduce emissions associated with electricity
consumption based not on the price of CO2 emissions but for other
environmental reasons. These additional efforts lead to an economic
benefit for all RGGI states in the form of lower allowance prices,
but they do not yield additional emissions reduction benefits. We
refer to this as the 'waterbed effect.' Reducing emissions in one
place simply makes available allowances to emit CO2 in another
place."
p 23-24 "Unless demand is so low that prices are at
the auction reserve price, low demand and low prices are an
economic benefit with no coincident environmental benefit. This
result is a manifestation of what we call the 'waterbed effect.' An
emissions reduction effort such as investment in energy efficiency
undertaken by any entity in a RGGI state will simply make more
allowances available to other RGGI entities and no additional
emissions reduction is realized, at least until a potential cap
adjustment as part of a subsequent program review. The waterbed
effect undermines the incentive for environmentally motivated
cities, states, companies, and individuals to take actions to
reduce emissions associated with electricity consumption as any
such actions may yield no climate benefit."
[https://media.rff.org/documents/RFF-Rpt-RGGI_ECR.pdf]
I encourage CARB and stakeholders to obtain more information
about this "waterbed effect" and potential regulatory or
legislative remedies from the state advisory bodies (IEMAC and
LAO). The most straightforward remedy would probably be via
implementation of HSC 38562(b)(1), which requires CARB to "Design
the regulations, including distribution of emissions allowances
where appropriate, in a manner that ... encourages early action to
reduce greenhouse gas emissions." When entities such as local
jurisdictions, communities, and individuals undertake actions
directed toward achieving emission reductions beyond mandated state
requirements (for purposes other than monetizing the resulting
surplus emission allowances), it would be appropriate to allocate
to those entities the surplus allowances resulting from such
action. This can be effectively achieved by establishing some type
of "early action allowance reserve" for holding surplus allowances
that have been withheld from circulation. The allowance reserve
will reasonably assure additionality of complementary climate
actions in the context of Cap-and-Trade. Specifically:
- For Local/regional Climate Action Plans that achieve
quantified emissions reductions in capped sectors beyond their
pro-rata share of mandated statewide reductions, the resulting
surplus allowances would be held in reserve as long as the CAP's
GHG reduction goals are being achieved. The reserved allowances
could be deducted from allowance accounts that would have otherwise
covered the emissions in the absence of such action.
- For GGRF expenditures (California Climate Investments) that
result in quantified emissions reductions in capped sectors, the
resulting surplus allowances should be put in reserve. (Regardless
of whether this reform is implemented, CARB should separately track
and report GGRF-related emission reductions in capped and uncapped
sectors, which it currently does not do.)
- For utilities' Green Power programs, customers' purchases of
premium Green-e-certified renewable power should result in the
associated surplus allowances being put into reserve. The integrity
of the Cap-and-Trade emission reporting and regulatory apparatus
would enable utilities and the Center for Resource Solutions to
certify additionality for Green Power purchases in California.
- Individuals and organizations wishing to reduce their carbon
footprint via offsets should be able to easily purchase allowances
in small quantities and deposit them into the reserve. Again,
Cap-and-Trade would provide a robust guarantee of additionality for
such offsets.
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