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newsclips -- ADDENDUM to Newclips for June 28, 2010.

Posted: 28 Jun 2010 14:18:24
ADDENDUM to Newclips for June 28, 2010. California Offers
Divisive Cost-Control Options For Cap-And-Trade 
Carbon Control News

California officials are floating new proposals to minimize
costs on companies and consumers under the state’s proposed
greenhouse gas (GHG) cap-and-trade scheme, including a plan to
expand the use of offsets that most environmentalists strongly
oppose. State regulators may also allow companies to borrow
future emission allowances to comply with current regulatory
obligations -- another controversial measure that is likely to
draw criticism in the weeks to come.

How California designs its cap-and-trade program is being
closely followed by numerous government officials and
stakeholders, in part because the program could influence climate
change proposals at the federal level and because it is expected
to have economic and environmental impacts well beyond the
state.

During a June 22 public meeting, staff with the California Air
Resources Board (CARB) floated new options it is considering to
minimize costs when it launches its cap-and-trade program in
2012. CARB is expected to adopt the regulations this fall. Some
of the key draft measures are:

* Set a minimum auction price for allowances, in part to prevent
collusion among purchasers, with unsold allowances being held in
a special reserve holding account.

* Relax the currently proposed limit of GHG offsets from 4
percent of total compliance obligation to 8 percent when a
certain allowance price is reached.

* Allow limited use of future “vintage” allowances intended for
a following compliance period to be used to satisfy a current
compliance period.

* Release more allowances from the reserve under certain
circumstances.

Some of the problems associated with relaxing the offset limit
include that additional offset supplies may not be available, and
that projects may need assured future access to the market to be
viable, according to a CARB presentation during the June 22
meeting. Expanding offsets will also lower the amount of GHGs
that are reduced at facilities in California.

Problems with allowing entities to use future vintage allowances
to comply with current obligations include that direct emission
reductions will be lagging behind the overall decline in the GHG
cap; it results in fewer allowances available in the next period;
and it could create a need for continuous borrowing -- at the end
of 2020, some entities may have failed to reduce emissions fully,
according to CARB staff.

With regard to the proposal to establish an allowance reserve,
CARB is considering an option to make the reserves available for
direct purchase by entities at a “window,” which would require an
allocation method when demand for the reserves exceeds the
supply. This option could result in directly and freely
allocating these reserves to covered entities.

Researchers at Duke University’s Nicholas Institute for
Environmental Policy Solutions who are helping CARB with its
proposals said at the meeting that some of the options being
floated by CARB staff are similar to provisions contained in the
pending federal legislative proposal by Sens. John Kerry (D-MA)
and Joseph Lieberman (I-CT), as well as the bill passed by the
House last year by Reps. Henry Waxman (D-CA) and Edward Markey
(D-MA).

Proposed Price Floor

Tim Profeta, director of the institute, said at the June 22 CARB
staff meeting that the Waxman-Markey bill, for example, proposes
a price floor of $10 a ton of carbon dioxide-equivalent. The
Kerry-Lieberman proposal also creates a reserve and would expand
allowance supplies if certain high prices are reached. At a
certain level, the legislation would also create a
discount-window approach that is similar to what CARB is
considering, he said. Firms would be able to buy directly out of
the reserve at a set price but each firm would be limited to
buying no more than 15 percent of its compliance obligation, and
these allowances could not be banked or re-sold immediately,
according to the Kerry-Lieberman proposal.

CARB staffers are considering directly allocating the reserve
allowances to covered entities in situations that trigger the
reserve in part because most entities will be receiving their
base allowances freely at the start anyway, one CARB staffer said
during the meeting.

Utility representatives appeared to be fairly pleased with the
direction CARB is heading in the proposed cap-and-trade program.
Frank Harris, representing Southern California Edison, one of the
state’s major investor-owned utilities, indicated support for the
“window” reserve allowance allocation option, but questioned the
15 percent limit included in the federal legislation. The window
option “provides some investor certainty and . . . is probably a
little more straightforward than developing a price trigger and
then creating a mechanism for the ability to access a reserve,”
he said.

Ray Williams, representing Pacific Gas & Electric, said
“utilities have done some shared thinking and are reasonably
well-aligned with what [Harris] has outlined,” adding that “we’re
looking for a price collar mechanism that has environmental
integrity and also provides price and supply assurance.”

Norm Pedersen, an attorney representing the Southern California
Public Power Authority, which represents municipal utilities
including the mammoth Los Angeles Department of Water & Power,
said the outfit is “thrilled with the direction staff is taking,
and very encouraged with what we’re seeing.”

However, Pedersen said CARB may not be adequately containing
costs with its reserve proposals because there likely will still
not be adequate allowances in the pot. He proposed that CARB
consider expanding the number of overall allowances regulated
entities receive from CARB based on changes in actual industrial
and other GHG emissions that have resulted from the economic
recession over the past two to three years. For example, CARB
would establish a 2012 cap on emissions based on the best current
forecasts of emissions, but then CARB could also establish a
“pre-recession” forecast of 2012 emissions, which would be much
higher. The difference between the two could then “populate” the
allowance reserve, he suggested.

Utilities, manufacturers and other industry representatives are
supporting the CARB staff option to expand offset use under the
California cap-and-trade program, with carbon offset providers
and brokerage firms calling on staff to go much further by
placing no limits on offset use.

However, several environmental organizations are strongly
opposing lifting the previously proposed 4 percent cap on the use
of offsets to satisfy compliance obligations. Erin Rogers,
representing the Union of Concerned Scientists (UCS), said at the
June 22 meeting that expanding offset use threatens to increase
GHGs and other pollution in disproportionately affected
communities in California. She said this directly conflicts with
provisions of AB 32, the state’s 2006 global warming solutions
law that required the sweeping climate change regulatory program
and the cap-and-trade scheme.

Peter Miller, representing the Natural Resources Defense Council
(NRDC), said the environmental organization does not prefer
borrowing allowances from the future to satisfy current
compliance obligations, in part because it fails to set an
accurate carbon price signal and likely would increase pressure
on regulators to relax caps in the future. Further, Miller
suggested CARB staff consider lowering the offset limit when
allowance prices are low, in addition to expanding it when prices
are high.

Will Barrett, representing the American Lung Association of
California, said expanded offset use would forgo or eliminate
pollution-reduction “co-benefits,” which is a key piece of AB
32.

Alex Jackson, also representing NRDC, pointed out that
cap-and-trade itself is a program aimed at lowering the costs of
GHG regulation, indicating that allowing the expansion of offsets
might be too generous on the regulated entities and could
compromise certain aspects of the program. NRDC is also concerned
about allowing borrowing of allowances from future compliance
periods, he said.

Questions remain over how the distinct provisions of
California’s cap-and-trade program will link to the Western
Climate Initiative (WCI), a proposed regional cap-and-trade
program that includes California and several other states and
Canadian provinces. That program is also expected to launch in
2012.

For example, Dhaval Dagli, another representative of Southern
California Edison, asked CARB staff at the meeting whether a
California entity could purchase a GHG allowance from a linked
program under a condition in which a price trigger has been
reached, or whether the linked state would also have to be in a
price-trigger condition.

A CARB staffer responded generally that California does not want
to link to a system that is “less rigorous” in terms of its
cost-containment measures or offset project quality. Further,
“we’re currently having those discussions within the WCI about
the need for coordination between cost-containment mechanisms.”

 

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