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California and AB32: 2008: ARB Scoping Plan discusses designs for California's Carbon Market In 2006 California passed the Global Warming Solutions Act (AB32), committing the state to reduce carbon dioxide emissions to 1990 levels by 2020. AB32 gave the California Air Resources Board (CARB) the authority to impose an economy-wide cap on state-wide greenhouse gas emissions. CARB has a multi-track process which includes considering market mechanisms in its Scoping Plan. We
will be following the discussion of market mechanisms in the ARB's
AB32
Scoping Plan. Comments can be submitted online from that link
as well. The final Scoping Plan will be adopted in Fall 2008.
After the Scoping Plan is adopted, CARB will embark on a 2-year
effort to develop specific implementation policies. Recent
comments on the AB32 Scoping Plan: Excerpts from the Draft Scoping Plan: Pg 47 Use of revenues: "Consumer
rebates - Utilities and other businesses could use revenues to
support and increase rebate programs to customers to offset some
of the cost associated with increased investments in renewable
resources and to encourage increased energy efficiency. "ARB is seeking comment on how such revenues could best be used." Pg. 53 Regressivity: "As
part of the economic evaluation, ARB is also assessing the potential
impact of AB 32 implementation on households by income. Some of
the likely impacts of AB 32, such as increased energy prices,
are expected to have a larger effect on lowerincome households
because they spend a higher percentage of their income on energy
such as gasoline, electricity, and home heating than do higher-income
households. For example, in an April 2007 report the Congressional
Budget Office found that price increases for electricity and gasoline
would disproportionately affect people at the bottom of the income
scale. Such impacts can be partially or fully mitigated through
both through more efficient cars and homes, as well as program
design options that lower costs (and thereby lower energy costs),
protect low-income ratepayers, and/or generate revenue which can
be used to directly address increased costs for low income households." Here is a factsheet summarizing some of the debate over how to spend the auction revenue (pdf). Should revenues be invested to reduce emissions, or returned to consumers as a dividend, rebate, or share? We
believe that consumer compensation is the best use of auction
revenue. Other public goods including energy efficiency, transit,
green jobs, R&D, renewable energy, and more may be funded
by carbon fees and shifting government budget priorities.
January-June
2007: In 2006 California passed the Global Warming Solutions Act, committing the state to reduce carbon dioxide emissions to 1990 levels by 2020. A Market Advisory Committee (MAC) was formed to advise the state on market measures, especially cap and trade. Dozens of citizens provided public comments to the Market Advisory Committee, including:
The
Market Advisory Committee Final
Report contained the following sections supportive of some
of the ideas promoted on the Carbon Share website. Section 6.1.2,
page 56 is on Use of Allowance Value- the topic of a recent workshop. "CARB may wish to convene an advisory group involving persons with budgetary experience and wide knowledge of energy, environmental, tax and budgetary policy, and including representatives of both the Department of Finance and the Legislature, to prepare a study outlining several sensible options for recycling revenues to businesses or individuals." "Some
observers have suggested that CARB may not have the authority
to auction and that auctioning might require further legislative
action. If this is the case the agency could consider a number
of alternatives to implement a design that would resemble an auction,
including allocation to a public trustee, LSEs, or local distribution
companies who could On
page 68, the report discusses the need for a price floor: A carbon
fee could become the price floor. The California Public Utilities Commission (CPUC) has been conducting a proceeding in coordination with the California Energy Commission (CEC) and parallel to the ARB and related to AB32. A portion of the PUC's proceeding focuses on a possible carbon market for the electricity sector. On March 11, 2008, the PUC published a Proposed Revised Interim Decision on Basic Greenhouse Gas Regulatory Framework for Electricity and Natural Gas Sectors, Draft Joint Agency Decision, publication # CEC-100-2008-002-D. "We
have determined that the next portion of this proceeding can be
most focused and productive if a few major design principles are
adopted in this decision. As a starting principle, it is important
that any policy for distribution of allowances provide that revenues
from the sale of allowances be used primarily to benefit consumers
in the energy sectors directly." "An integral part of this auction recommendation is that the majority of the proceeds from the auctioning of allowances for the electricity sector should be used in ways that benefit electricity consumers in California, such as to augment investments in energy efficiency and renewable energy or to provide customer bill relief. There are multiple ways to accomplish allocation of benefits to consumers." "The
CAISO Market Surveillance Committee describes two sources of rents
that, in its view, producers can capture with the implementation
of a GHG cap-and-trade system: "allowance rents" and
"rents of clean generation." "[I]f allowances are
given to load, and then sold to generators (perhaps via an auction)
for use in a source-based system, with the proceeds returned to
consumers, then these rents will, to some extent, offset the price
increases resulting from the cap-and-trade mechanism. These rents
are also retained by consumers under a load-based system." The PUC also rejected some of the comments from the Los Angeles Department of Water and Power, which opposed an auction and supported a giveaway (at least to LADWP). Here's what the PUC said: "In
its comments on the proposed decision, LADWP argues that the auctioning
of allowances would violate its right of home rule. While, LADWP
claims that an auction structure would financially undermine its
renewable procurement program, it has not substantiated this claim.
We are not convinced that a conflict exists between the use of
auctions under AB 32 and LADWP's home-rule authority to operate
its municipal utility. The courts have stated that "[t]o
the extent difficult choices between competing claims of municipal
and state governments can be forestalled in this sensitive area
of constitutional law, they ought to be; courts can avoid making
such unnecessary choices by carefully insuring that the purported
conflict is in fact a genuine one, unresolvable short of choosing
between one enactment and the other." (California Fed. Sav.
& Loan Background information About AB32: In September 2006, the State set statewide greenhouse gas (GHG) reduction targets by adopting AB32, the California Global Warming Solutions Act. The State committed to reducing emissions to 1990 levels by 2020. The State will enact policies that cause a reduction of an estimated 174 Million Metric Tons of GHGs. In 2007, the California Air Resources Board (CARB) will begin implementing California’s greenhouse gas targets. CARB has scheduled several upcoming events related to the implementation of AB 32. The events webpage also contains an archive of comments and presentations from meetings throughout 2006 and 2007. One of the options the state is looking at to reduce greenhouse gases is a cap and trade system. Emissions are capped, rights are distributed, and the market sets a price for carbon. About cap and trade: •
Carbon cap and trade is a market-based way for a state to combat
climate change. Capping
carbon creates economic value "Cap and Trade" became a controversial issue during the negotiation of AB32. One of the main concerns was who gets the emission rights? Who gets the emissions rights? How are the rights distributed?
In 2007, the California Air Resources Board and the Market Advisory Committee began considering whether to:
Emission Rights Allocation Options:
Which allocation methods support the public trust? Public Trust Allocation vs Giveaway:
How to use the revenue from an auction: 1) Public Goods Auction: The State sells the rights to the highest bidder, then uses the proceeds to fund public goods such as energy efficiency, renewable energy, research, or other projects to reduce more greenhouse gases.The public goods investments can accelerate GHG reductions and ease the transition to low-GHG technologies and lifestyles. 2) Auction with Dividends: Similar to Public Goods Auction, the State sells the rights to the highest bidder, then uses the proceeds to provide cash dividends to consumers on a per capita basis.The consumer rebate compensates for higher fuel or energy prices. Carbon conservers come out ahead, while carbon guzzlers pay more. 3) Carbon Share: The State distributes a carbon share to each consumer. Consumers cash the share at a bank or brokerage.The bank or broker sells the share to carbon importers and producers on the open market. About per capita compensation: Limiting carbon emissions will most likely raise fossil fuel prices. Distributing 'consumer dividends' or 'carbon shares' can reduce the impact of higher fuel prices on households. Consumer compensation on a per capita basis would institutionalize equity and address disproportionate impacts to low-income households. A rise in fuel prices has a regressive impact, since low-income households spend a greater portion of their income on necessities like fuel. But the amount they spend is typically lower than high-income households. A per capita rebate, dividend, or share would help low-income households (who typically use less fossil fuel) more. Two types of per capita compensation are Dividends and Carbon Share. With dividends, the State auctions all permits under the cap and provides a cash dividend on a per capita basis to Californians. In Carbon Share, the State distributes the CO2 under the cap as per capita "shares" of CO2 to all Californians. Citizens cash the shares at banks and brokers. Banks and brokers sell the shares to the regulated companies on a private exchange. As the price of CO2 rises, the value of the dividend or Carbon Share would rise. Because consumers are receiving the scarcity rents from the increased prices of fossil fuels, consumers may continue to provide popular support for further emission reductions. Analysis: Auction and Carbon Share can co-exist. Public goods investments can help society make the transitions needed. The Dividend reimburses consumers for increased fossil fuel prices, and helps the hardest hit the most. Carbon Share has the same economic effect as the auction, including revenue recycling to consumers, but involves the financial services industry, providing an alternative to a government-run auction. Recommendation:
Auction (sell) 100% of permits. Use revenues for Public Goods
investment and per capita compensation. Per capita compensation
could be accomplished by a dividend or Carbon Share. The California Air Resources Board and State Legislature need to hear from their constituents. Questions for CARB: How will CARB implement the cap? Will CARB give the emissions rights under the cap 1) to consumers, 2) to auction by the State, or 3) to the fossil fuel industry? Will
CARB learn from the mistakes of previous cap and trade systems
such as RECLAIM and Europe’s Emissions Trading System? Suggestions for CARB: 1) Auction (sell) 100% of carbon emission permits. Revenues should be used for public goods and per capita compensation. The State should consider the Auction with Dividend and Carbon Share and other forms of consumer per capita compensation in the design of a California carbon market. 2) Remove the giveaway (grandfathering) from further consideration. Implement an upstream, 100% auction system with consumer compensation. 3) Study per capita consumer compensation, including per capita cash dividends, and Carbon Share. Conduct or commission a technical study on public trust allocation and per capita compensation, including the Dividend and Carbon Share. How could the State implement a Carbon Share program? How does Carbon Share compare with other cap and trade options for GHG reduction in achieving the AB32 Market Advisory Committee's Market Design Guiding Principles? Is Carbon Share part of the best approach to allocating emission rights? Which agency would manage a Carbon Share program? What role should the financial services industry play in the development of the program? 4)
Consider giving Californians the choice of Dividend, Tax Rebate,
or Share.
More about allocation options. More information on the State of California's Climate change activities can be found at the California Climate Change Portal. California's carbon market may be linked to the Western Climate Initiative. Have you signed CPC's Cap & Dividend petition? It's at http://www.thepetitionsite.com/1/Californian-Climate-Rights What's
going on outside California? (Federal,
International efforts)
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Carbon
Share works alongside the Climate
Protection Campaign.
For more information, contact Mike Sandler (707) 529-4620 or email mike [at] carbonshare.org. |