CARB Economics

California took steps to demonstrate its environmental mojo once again releasing draft regulations to reduce California’s carbon dioxide and other greenhouse gas emissions to 1990 levels by 2020.

The 135-page draft regulation by the California Air Resources Board [1]sets a declining ceiling on greenhouse gas emissions and permits emitters to buy and sell permits to achieve the targets.  CARB scheduled the draft rules for public comment and revision saying it plans to adopt final rules by December 2010.


The rulemaking is required under California’s AB32 Global Warming Solutions Act which initially targets the 600 largest sources of greenhouse gas emissions such as electric power plants, refineries and concrete plants. After 2015, the emissions reduction requirements also will apply to other industrial emitters and transportation fuels.

The CARB draft rules go farter, faster than the RGGI rules adopted for the northeastern U.S. states regional trading system which focused on carbon dioxide emissions by big emitters. California plans to include almost every source of emissions to reach its goal.


Negotiating the Scope of the Final Rules


As expected California businesses complain the plan goes too far too fast, and will cost too much. A state advisory panel is at work revising the cost estimates for the AB32 compliance rules including questions about providing allowance support to ease business into the program and moderate costs.  But those recommendations are not due until 2010.  Make no mistake this will be costly and those costs will be layered on top of electric utility rates already spiking because of California’s ambitious renewable energy portfolio standards, costs for adding smart metering and other regulatory drivers.


While California voters generally favor environmental clean up strategies they are only beginning to feel the cost consequences of these new rules and programs even as the brunt of the recession still bears down on them.  There is a risk of voter and ratepayer backlash and politicians are becoming more cautious, but the die is cast in California and the practical result is that voters are more likely to take it out on incumbents at the next election than roll back the rules.


The draft rules CARB released November 24 2009 avoided several very tough issues yet to be resolved—will power companies and other large emitters get free allowances and if they must pay, how much will they be required to use an auction of credits to cover their emissions requirements.  Remember, Waxman-Markey sought to buy support by giving away large number of emissions allowances.  California emitters have learned that lesson and also want allowances given at little or no cost up front in any final rules regime adopted.  Doing so may mitigate some objections but it also undermines the effectiveness of the rules and delays their desired results beyond the 2020 target date.


How Much Will This Cost?

CARB Chair Mary Nichols said she expected the cost of an allowance for a ton of carbon dioxide initially should be around $10 based on how other programs operated. That is about half the current European price.  While a low allowance price will ease some of the concerns of emitters and the business community, a low allowance price will not be enough to change behaviors enough to achieve emissions goals California set in AB32.

Put that in perspective, in the most recent auction of emission allowances in the ten Northeastern states which are part of the Regional Greenhouse Gas Initiative (RGGI) the clearing price for the roughly 31 million CO2 emissions allowances that were just sold dropped in the latest auction for the 2009 vintage to $3.23 per allowance. The RGGI auction for the second three-year control period beginning Jan. 1, 2012 saw 2.2 million allowances go for the 2012 vintage cleared at $2.06 per allowance.

So California officials expect their emissions reduction strategy to cost more—much more than the one in place in RGGI.  But state regulators responsible for implementing the 33% RPS standard are already saying the cost of that program will be significantly more.  So it is reasonable to assume that layering AB32 compliance on top of the 33% RPS targets will result in substantial rate increases.

Can California Make this Work?

The California Public Utilities Commission (CPUC) said achieving the 33% RPS goal will take until 2024 not 2020, and cost as much as $12 billion more in new transmission lines just in California to get such large scale renewable energy to market.  It will also raise utility rates even higher than the 16.7% rate increase required to achieve the current 20% renewable portfolio standard by 2020; and may not be cost effective because natural gas prices would have to be higher than $13.87/MMBtu and any proposed CO2 tax would have to be higher than $100 per ton for renewable energy to be an effective hedge against fossil fuel prices from today’s typical utility portfolio. [2]

Achieving the 33% RPS goal is a condition precedent to implementing the AB 32 emissions reduction goal.  The BIG RISK facing California’s breathtaking push forward on these dual goals of expanding the use of clean and renewable energy while reducing greenhouse gas emissions is that it will take longer, cost more—MUCH MORE—and may not work to change behaviors sufficiently to be sustainable over the long term unless the prices set are higher than most of us will find affordable or tolerable.