Cap-and-trade: Fix needed now on regulation

A powerplant at sunset. (Photo: David Crockett)

Governor Jerry Brown proposed in his recent state-of-the-state address that California should take steps to approve an aggressive new greenhouse gas reduction goal for 2030. This additional proposal would take California beyond the current 2020 goal set by Assembly Bill 32, the California Global Warming Solutions Act of 2006. The AB 32 Implementation Group is concerned that creating a 2030 goal will shift attention away from current regulations that are intended to meet the greenhouse gas emissions goal California’s elected officials adopted in 2006 for 2020.

We recommend that the cap-and-trade regulation be reopened this year for review and needed amendments. This information will give all stakeholders the tools to assess what has been accomplished.

We are still five years away from 2020 and the most challenging aspects of AB 32 implementation are yet to come. For example, in the cap-and-trade program the California Air Resources Board (ARB) has held several auctions during which it has sold hundreds of millions of allowances to covered entities, financial intermediaries, speculators and other, some of these parties are interested in selling these allowances at a profit. While the program is moving forward, challenges and tests remain. These tests include the fast approaching the final compliance deadline for the first compliance period on November 1, 2015. As this date comes closer, it becomes increasingly important that any design flaws are addressed to ensure a functioning market. In short, the true test of the design of the cap-and-trade program remains.

There will be no appetite for 2030 policies if cap-and-trade and other major regulations cause serious complications between now and 2020 for businesses, consumers and the economy.

One of the best ways to ensure the market continues to function properly is for regulators and stakeholders to work together to identify and address key issues. For example, the cap-and-trade regulation needs to be amended to provide a firm price cap to ensure that volatility is minimized in the carbon allowance market. UC Professor Severin Borenstein, a member of an expert advisory committee to the ARB, advocates for a firm price ceiling not only to limit the price but also to help “deter speculative attacks and attempts at market manipulation.”

Moreover, in 2018 many manufacturers face a huge new cost under the cap-and-trade regulation when they will be forced to buy 25% more allowances in order to keep operating at the same level in the state. Some companies will pay more, others less in this discriminatory regulatory design. This requirement is not needed to meet the 2020 target, it will add significant costs to some of the largest employers in the state, but the ARB has not yet removed this onerous requirement.

Other design elements of cap-and-trade program will constrain the market and make volatility more likely and increase the risk of penalties for companies trying to do the right thing. Fixing these problems won’t hurt our ability to reach the 2020 targets, but would make compliance more affordable and protect jobs and the economy.

For these reasons we recommend that the cap-and-trade regulation be reopened this year for review and needed amendments. This information will give all stakeholders the tools to assess what has been accomplished, what needs to be achieved, take stock in which policies have worked, and what course corrections may need to be taken.

Having this information available for the Administration, the Legislature, the ARB and all stakeholders will assure California’s cap-and-trade regulation is operating at its potential and is designed to be a model for other states and nations.

It’s easier to set ambitious goals than it is to achieve them without harmful and unintended consequences. Our best chance of making California the model for other states and countries on climate change is to make AB 32 a success at the same time we plan for the years beyond 2020. We recommend that the Governor and Legislature direct the ARB to return to the the task at hand and finish the cap-and-trade program design work that needs to be accomplished between now and 2020.

Shelly Sullivan is the executive director of the AB 32 Implementation Group, comprised of employers and taxpayer groups advocating for policies to achieve greenhouse gas emission reductions while protecting jobs and the economy.

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