Regulators have won praise for speed and thoughtfulness with which they have laid the groundwork for implementation of A.B. 32, the landmark bill that aims to bring California's greenhouse gas emissions down to 1990 levels by 2020. But even within a single state, climate change legislation creates winners and losers, and regional tensions are starting to show.
California's climate plan consists of a slew of new efficiency standards, regulations, and reduction measures -- as well as a cap-and-trade system to place a lid on total emissions. It's the cap-and-trade system that is part of the present pushback.
At issue in particular are the long-term contracts that the Los Angeles Department of Water and Power (DWP) has entered into for coal-based electricity. Although coal has kept L.A.'s electricity some of the cheapest in the state, the utility will have to pay enormous sums for carbon allowances under the new law.
It's always instructive to unpack some of the distortions that surround the politics of climate change legislation. Officials from L.A. seem to be trying out three different angles in their resistance to the bill. The first is that the steep cost of the allowances will divert money away from energy efficiency and renewable energy programs.
Officials with the utility, which serves 4 million residents, project it will have to pay $700 million annually in fees for burning coal under the cap-and-trade system being considered. That will divert money it currently spends on expanding energy efficiency and renewable energy programs, said David Nahai, the DWP's general manager.
"It will certainly affect our customers," said Nahai, whose agency is lobbying the Schwarzenegger administration to reconsider its strategy.
The implication is that the fines will actually harm the environment by siphoning money from all the great green work DWP is doing. The logic here is flawed in at least three different ways:
- Raising prices for electricity from coal is itself an efficiency program, providing a powerful incentive to DWP's customers to use less energy.
- And, of course, the hefty fines are actually a spur to DWP to speed up investments in efficiency or renewables. Any ton of CO2 they can reduce directly for less than the cost of an allowance will be a benefit to their bottom line. For example, maybe DWP can take another look at those smart meters that SoCal Edison is handing out in San Diego
- Under a cap-and-trade system, that $700 million is going to get paid out to other polluters who can do a better job than DWP at reducing emissions. Even if we take the claim that the payment will reduce funds for DWP's own efficiency programs at face value, that's O.K. It just means that someone somewhere else has a better efficiency program.
The second line of attack is to pretend that cap-and-trade is a form of accounting trickery that won't bring about "real" reductions:
"We expected more nuts and bolts on real emission reductions. Instead, the easy way out for everybody, as it has been in Europe, is a cap-and-trade system," Nunez said. "That's not really what this is about. The reason you have to mandate reductions is, if you don't, you don't force investors to bring technologies into place."
But of course, a cap is a mandated reduction. The only way "nuts and bolts" proposals for requiring specific technologies will work out better for DPW is if the regulations result in fewer greenhouse gas reductions than would take place under a cap (otherwise there'd be no issue -- DPW could just implement the technologies themselves to meet their carbon reduction obligations). Put more simply: This is a roundabout way of asking for a weaker bill.
The third line of attack is basically the equivalent of yelling boo: making vague insinuations about market manipulators, Enron, rolling blackouts, "untested financial schemes," etc. One has to imagine that this sort of thing is remarkably effective in California.
But hopefully not too effective. California's experience will be important for the nation as a whole, and regulators are moving swiftly in the right direction.
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Comments
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F James Handley Posted 5:51 am
04 Aug 2008
But AB 32's cap-and-trade program is a very costly, inefficient and unfair way to "force" GHG emissions reductions. (Reductions are likely to be elusive without major, ongoing enforcement efforts.)
Economists are virtually unanimous: a gradually- increasing carbon fee would get far greater reductions for less pain. A thoroughly-researched Congressional Budget Office study concluded in February that a system of carbon fees or taxes would be roughly FIVE times as effective as a fixed cap. The EU's cap-and-trade system hasn't produced ANY net reductions and California's RECLAIM (smog cap & trading program) engenders huge price volatility with little or no pollution reduction, while concentrating pollution in disadvantaged areas.
See http://www.carbonfees.org, where two EPA enforcement attorneys debunk the myths of cap-and-trade (which they witnessed) and explain the advantages of carbon fees.
Also see http://www.carbontax.org for comprehensive information about the advantages of revenue-neutral carbon taxes over cap-and-trade.
YES, higher prices are necessary to induce conservation and investment in renewables. But cap-and-trade's price volatility sends mixed signals. And a cap has very serious (mostly hidden) income effects that aren't shared fairly.
A revenue-neutral carbon tax would be more effective and fairer. Glad California is taking the lead where the Bush Administration has thwarted all progress. Too bad the Golden State is rushing down a dead-end. I hope we can learn from this mistake at the federal level.
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Darrell Posted 8:30 am
04 Aug 2008
Plans especially include base-load geothermal in the Imperial Valley (which requires controversial new transmission lines), as well as desert solar thermal and in-basin rooftop PV. They do appear to be moving about as rapidly as they can on these.
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Wolverine Posted 8:44 am
04 Aug 2008
Why do we need the trade portion? Why would strict caps not provide the desired results?
How could a carbon fee possibly get better results than a direct cap, the latter of which gets the results directly?
Why can't we have a carbon tax and a cap (and trade, if necessary)? Are they mutually exclusive for some reason?
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F James Handley Posted 11:51 am
04 Aug 2008
Yes, emissions traders introduce many problems and would require a huge monitoring and enforcement effort. Manipulations on the scale of Enron have been predicted and speculation on permit prices is already underway. In his new book "Question of Balance" Yale economist William Nordhaus predicts tradeable permits would become the new underground currency for terrorism, guns and drugs. (And what would be the sanction for rogue players? Cut them out of the emissions reduction regime?)
"Cap" without "trade" would be a regulation. E.g., "Every facility (individual?) must reduce CO2 emissions X percent a year." Some can do it cheaper than others and some can do it sooner than others. Hence trading was introduced to allow optimization.
But to work, cap and trade requires that emissions be permitted and that permits be tradeable. Permits should all be auctioned. (Why would we give past polluters a free, vested right to keep polluting?) As the Republicans helpfully pointed out during the debate over the Lieberman cap-and-trade bill, auctioning permits and requiring all emitters to have a permit for every ton of CO2 is a tax. In fact, the biggest tax ever.
The Lieberman bill would have reaped from energy consumers (hitting the poor hard) $4.3 trillion (yes, that's a "t") and doled it out to past polluters and to big, dirty energy corporations, with handouts to favored "renewables" like: corn-based ethanol, nukes and so-called "clean coal" research. (See Friends of the Earth's "giveaway analysis" of Lieberman's bill.) Not much to real renewables like wind and solar.
So economists of all stripes (and a few enviros are coming around) prefer a staight tax on fossil fuels in proportion to their carbon content. (Coal highest, petroleum in the middle and natural gas the lowest.) No traders. No permits. No price spikes. Easy to internationalize. No bickering over the cap: who's covered, and who gets exemptions, etc.
If the tax revenue is used to offset other taxes, it's called a "tax shift." (Canada is debating a "Green Shift" along these lines.) Offsetting regressive taxes (e.g., payroll taxes) could make the carbon tax progressive. Or a direct, equal (monthly?) "dividend" (share of the carbon tax revenue) to individuals would offset the income effect, pumping all the carbon tax revenue back into the economy -- hitting the bigger fossil fuel users the hardest but more than offsetting the price increases felt by those using less than average. A revenue-neutral carbon tax would create ongoing incentives for everyone to conserve and switch to alternatives.
That's exactly the opposite of what cheap fossil fuel energy tells us to do now: encouraging us to use as much as we can. Efficiency advances have been overtaken by new uses for cheap fuel.
Can't think of a reason that a cap and a tax couldn't be done together, but a cap (with necessary monitoring and enforcement) just isn't needed if the tax is high enough and goes up predictably to affect behavior and planning.
A hybrid approach is a cap with a price ceiling or "offramp." When the price of permits hits the ceiling, a "safety valve" is opened. That's helpful to limit price spikes, (but of course removes the emissions certainty of a fixed cap) and we'd still have the complexities of implementation (the EU's cap-and-trade system is a nightmare and has acheived no net reductions) as well as traders, the opportunities for gaming the system, and the regressivity of a hidden carbon tax.
About the only advantage of cap-and-trade is that it's not called a "tax" (even though it is a huge, regressive tax). Aside from frightful name, a revenue-neutral carbon tax is truly an elegant and transparent system.
Check out The Carbon Tax Center for more information. www.carbontax.org.
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Paleocon Posted 4:14 pm
04 Aug 2008
The poor don't pay taxes in this country. They consume services.
This is social engineering at it's worst. Especially when you consider that a whole new breed of leeches has sprung from this swamp.
You don't like so-called "regressive" taxes? Set a floor and charge a flat rate above that floor.
The argument about payroll taxes being regressive is a hollow defense of wealth redistribution. BENEFITS ARE CAPPED. No matter how much I pay, I will never be entitled to any more than those who pay far, far less.
California doesn't need anymore $167,000 a year bureaucrats who don't pay ANY SS taxes.
"...a 90 percent chance that the US has contributed .2 degrees F of temperature increase in the last 50 years..." The IPCC Consensus in perspective
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davidzet Posted 2:28 am
05 Aug 2008
In the early 90s, there were severe penalties for using more water (a drought, sound familiar?) and LADWP cut its [customers'] use by enough to get millions of "conservation" rebates.
I favor a tax over C&T (for reasons discussed above), but be SURE to know that LADWP will reduce emissions if there's money at stake.
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rsmith02 Posted 3:57 am
05 Aug 2008
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msandler Posted 4:03 am
05 Aug 2008
Before getting into LADWP's arguments, I'd like to say that the tax versus cap debate is too simplistic. Don't we all drive hybrid cars? Why can't we have both a tax (fee) and a cap? The fee could be the price floor in a cap and auction system. I agree that previous capped systems were flawed, but we're learning that we need to auction 100%, and we need to rebate revenues to consumers to preserve political support.
Anyway, the topic of my comment is LADWP's arguments. I agree with the author that LADWP is one of the state's main opponents to capping, and they are using two arguments that I call "RPS-first" and "wealth transfer."
The "RPS-first" argument is the claim that they are already paying for renewable energy to meet their RPS requirements, and they need the money that would otherwise go toward purchasing permits to fulfill the RPS. But, this argument can be rebutted because the RPS is separate from an allowance price in the carbon market. Making coal more expensive will speed up the transition. The question is how fast can we go, and LADWP thinks, not very fast. But most of the state can go faster than LADWP. Should they pay for being slower? From an economy-wide efficiency perspective: yes.
The "wealth transfer" argument is that LADWP and other Southern California public utilities have more coal in their electricity mix than other utilities, therefore they would pay more for permits, but when the revenues are reinvested by the PUC or ARB or other state agency, the revenues will not be returned proportionately to the Southern California ratepayers. But, the potential "wealth transfer" can be avoided if the revenues are used by the State to provide an equal per capita dividend to all Californians. LADWP and every other business or organization cannot claim they were treated any differently than anyone else. LADWP and others can raise their rates, and will not be put out of business. The regressive impacts still do need to be addressed, and that is why we advocate for the per capita dividend. More info at http://www.carbonshare.org.
LADWP's average household electricity bill is about $50, while other large utilities' average bill is about $70, so they have some room to raise rates without actually carrying an unfair burden. By the way, I should mention that I am an LADWP ratepayer.
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Wolverine Posted 6:20 am
05 Aug 2008
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