Flawed cap-and-trade plan can still be fixed before Legislature leaves

After years of bureaucratic fog, there’s a ray of sunshine illuminating and hopefully repairing the California Air Resources Board’s (CARB) seriously flawed cap-and-trade auction program.  A group of legislators, armed with an opinion by the state’s Legislative Analyst’s Office  (LAO), is calling for common sense and moderation in a policy that is on the brink of costing California businesses and consumers billions of dollars, workers their jobs, and the state and local governments reduced revenues.

The business community has long supported a well-designed cap and trade program to help meet the goals of AB 32, the 2006 Global Warming Solutions Act. AB 32 instructs CARB to implement AB 32 in the most cost-effective technologically feasible manner.

All that changed when CARB saw an opportunity to rake in billions of dollars by withholding some of those emissions allowances. This would force California companies to compete for allowances in an auction that would pit them against global investors and speculators.  When projected auction revenue found its way into the state’s general fund budget, the LAO estimated proceeds could range upwards of a billion dollars in the first year alone and significantly higher by 2020.

Stakeholders from all regulated sectors did the math and concluded the auction would add up to an economy-wide fiscal disaster.  Three of the state’s largest utilities testified that even if 100 percent of the auction revenue were returned to ratepayers, the rebates would fall far short of the amount needed to offset the enormous rate increases precipitated by the auction and other GHG reduction policies.

The University of California, a less-frequently cited entity that would be caught in the auction web, pleaded for relief on behalf of several of its campuses that would be saddled with millions of dollars in allowance costs, with no choice but to pass them along to students in the form of higher tuition.

Studies have shown the auction would contribute to higher energy costs that could result in food processors, manufacturers, refiners and other businesses fleeing the state, taking jobs and tax dollars with them.

But a bipartisan group of legislators took notice.  They hosted fact-finding forums throughout the state, hearing not only from policymakers and environmentalists but from representatives of the businesses that would ultimately have to pay the bills and pass those costs on to consumers.

Finally, the Legislative Analyst’s Office was asked to provide lawmakers with information about the need for an auction, and the free allocation of allowances under CARB’s cap and trade program.  The LAO’s conclusion was decisive:  “An allowance auction is not necessary to meet the AB 32 goal of reducing GHG emissions statewide to 1990 levels by 2020.”

The LAO went on to report that the auction as planned would likely increase production costs, which would decrease demand for goods manufactured in-state and drive businesses to downsize, relocate to other states, or shut down altogether. And, importantly, there would likely be no reduction in GHGs because those emissions would be shifted to other states without California’s stringent emissions caps.

The LAO concluded, “a key advantage of 100 percent free allocation is that it would offset significantly more of the marginal cost increase resulting from compliance with the program as compared to the CARB approach and reduce the potential for leakage while preserving the environmental integrity of the program.”

All of this has culminated with a group of well-informed legislators formally petitioning the Governor to intercede by directing CARB to increase the number of free allowances.  This would, they declared, “allow the cap and trade program to function in the most efficient and cost-effective way by reducing emissions, encouraging innovation and protecting California businesses, public agencies, universities and consumers.”

In a state that has been consistently ranked as having the worst business climate in the nation, these legislators have taken a courageous first step toward providing California businesses some much-needed regulatory relief without compromising the goals of AB 32.

Let’s hope Governor Brown heeds their advice.

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Ed’s Note: Jack Stewart is president of the California Manufacturers & Technology Association.