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FOR IMMEDIATE RELEASE:	
		
January 11, 2010

CONTACT:   
BreAnda Northcutt
Lindsay VanLaningham
(916) 324-9670

Stanley Young, ARB
(916) 322-1309
		
Advisory Panel Recommends “Household Friendly” Approach to
Carbon Regulation

EAAC Recommendations Depart from Existing European, 
Proposed Federal Cap-and-Trade Designs 

SACRAMENTO – Today, the 16-member Economic and Allocation
Advisory Committee (EAAC) released their final report of
recommendations to California officials on a range of economic
issues related to the possible design of a cap-and-trade system
to reduce greenhouse gas emissions.

Today’s final report includes key recommendations to help inform
the development of a cap-and-trade program by the California Air
Resources Board pursuant to the Global Warming Solutions Act of
2006 (AB 32). The proposal to return a large majority of the
allowance value back to households is a significant departure
from most federal proposals, as well as the existing Emissions
Trading System employed in the European Union.

“The issue of allocation strategy is one of the most important
elements of a cap-and-trade program. I am encouraged that this
diverse group of experts, with a broad range of perspectives, was
able to reach consensus regarding the importance of auctioning
the majority of emission allowances and directing the value back
to the people of California,” said Larry Goulder, Chair of the
EAAC and Shuzo Nishihara Professor in Environmental and Resource
Economics at Stanford University.

 “California policymakers have made a cap-and-trade program an
integral part of its strategy to implement AB 32. The Committee’s
objective is that the recommendations contained in this report
will assist the Air Resources Board in developing a cap-and-trade
program that is both effective and fair,” said Rick Frank, Vice
Chair of the EAAC and Executive Director of the Center for Law,
Energy & the Environment at the University of California,
Berkeley School of Law.

The EAAC recommends a “household friendly” approach to carbon
regulation by suggesting that the majority of allowance value
derived from California’s cap-and-trade program be returned to
households. Particular attention is recommended for low-income
and disadvantaged communities to ensure they are not
disproportionately affected by the program. Remaining allowance
value is recommended to be used to ensure a level playing field
for California’s workers and industries and for public purposes
that will also benefit consumers, including energy efficiency
programs, research on clean technologies, climate change
adaptation measures, and environmental remediation.

Cal/EPA and ARB asked the Committee to look at the allocation of
emission allowances and the various options for distributing
allowance value. It employed four criteria from AB 32 in
developing the recommendations: fairness, cost-effectiveness,
environmental effectiveness and simplicity.

The recommendations from the Committee will be considered for
possible inclusion in the draft regulation for California’s
greenhouse gas cap-and-trade program, due out this spring. A
cap-and-trade program is part of a broad based multi-sector
approach to reducing greenhouse gas emissions outlined in the AB
32 Scoping Plan, adopted by the ARB in December 2008. The Plan,
which serves as California’s roadmap for reducing greenhouse gas
emissions calls for a mix of complementary measures along with
the creation of a cap-and-trade program. The proposed
cap-and-trade program would cover 85% of California’s largest
emission sources including electricity generation, large
industrial sources, transportation fuels, and residential and
commercial use of natural gas.

The Committee’s final report makes the following key
recommendations:

•	Return nearly 75% of the allowance value to households,
through direct financial transfers or tax decreases. The report
recommends that 75% of the monetary value of allowances received,
after low-income assistance and some industry protections are
accounted for, be returned to households with the other purposes
accounting for the remaining 25%.

•	Avoid disproportionate adverse economic impact to low-income
households. The report recommends giving low-income households,
which spend proportionately more of their income on energy, some
of the allowance value, to balance possible increases in costs.
EAAC recommends financial transfers rather than subsidized energy
prices.

•	Use an auction as the primary method for distributing
allowances. EAAC finds that almost any purpose that could be
achieved through free allocation could also be achieved through
auction, and that auctions would be more transparent and provide
additional advantages including price discovery and market
liquidity.

•	Prevent leakage, through “border adjustments” or allocation.
Firms that rely most heavily on carbon-based energy, and that
compete directly with firms that do not face carbon regulation,
should be provided assistance to avoid loss of market share that
doesn’t result in emissions benefits. Where possible, California
should account for the carbon in imported products so that
in-state producers and out-of-state producers face the same
costs. Where that is not possible, allowance value should be
given to affected California firms to reduce their costs.

•	Do not give allowance value to firms for other reasons. The
report does not recommend that value be given to firms for any
other reasons than those cited above. The Committee recommends
against freely giving allowances to utilities to reduce the price
impacts on their consumers, which would remove the incentive for
consumers to invest in energy efficiency, and raise the societal
cost of the program.

•	Invest in a low-carbon economy; create an independent board to
advise and screen investments. The report offers principles to
choose among investments and lists many categories of targets. In
addition, the report recommends the creation of an independent
Investment Advisory Board to help ARB choose specific proposals.


•	Create an air pollution contingency fund. The report
recommends that if air pollution increases in disadvantaged
communities as a result of AB 32—considered to be an unlikely
outcome given safeguards built into the law—funds should be
available for remediation. If air pollution does not increase,
the funds should go to other recommended purposes.

•	Adopt an auction design very similar to that of the Regional
Greenhouse Gas Initiative (RGGI). RGGI, a collaboration of ten
Northeast and Mid-Atlantic states to reduce carbon dioxide
emissions from electricity, has held six cap-and-trade allowance
auctions.  Its auction design is relatively simple, and the
report recommends emulating it with one addition: allowing the
public to sell allowances in its auctions along with the state.

Next month, members of the Committee will present the key
findings of their report before members of ARB at their February
hearing in Sacramento. In addition to today’s final report,
Committee members also will help inform the ARB on its revised
economic analysis due to be released next month. 

The EAAC has met publicly ten times since it was created on May
22, 2009 by Linda Adams, Secretary for Environmental Protection,
and Mary Nichols, Chairman of the Air Resources Board. This
independent panel of experts is comprised of economic, financial
and policy experts with various backgrounds and experiences. 

For more information on the EAAC and to view the full report, go
to http://www.climatechange.ca.gov/eaac/. 

The Air Resources Board is a department of the California
Environmental Protection Agency. ARB's mission is to promote and
protect public health, welfare, and ecological resources through
effective reduction of air pollutants while recognizing and
considering effects on the economy. The ARB oversees all air
pollution control efforts in California to attain and maintain
health based air quality standards.

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