Opinion: Work is not complete on California’s cap-and-trade plan

The California Air Resources Board (CARB) has adopted a cap-and-trade system in time to meet the December 31, 2010 deadline for regulatory action under AB 32, California’s Global Warming Solutions Act of 2006.

Yet much remains to be done. Instead of a complete regulation that companies and the public can fully understand, there are “placeholders” for missing pieces and CARB staff will be adjusting other elements as work progresses next year. 

While CARB has rushed to meet its deadlines and provide positive investment signals for green investors, unfinished rules that must be enforced provide a great deal of uncertainty for the hundreds of businesses and employers that will be subject to the state’s climate change law.

Our group agrees that a well-designed cap-and-trade program could be a reasonable way to get the most cost-effective emission reductions to meet AB 32 goals. It is too early to tell if this regulation will pass that test and there are serious warning signs that it won’t.

One problem is that neither the federal government nor any other states have committed to join the cap-and-trade program. Now it’s only California, three Canadian provinces and possibly New Mexico.  Not enough to protect California. If we impose new costs on employers, local governments and consumers that are not also shared by other states, there is great potential for economic harm, loss of jobs and lower investments in the state.  

At the same time,  CARB is developing the cap-and-trade regulation, the federal government through the U.S. Environmental Protection Agency is considering climate rules that will cover the entire country including California.  Will the cap-and-trade program be on top of federal requirements?  That simply makes no sense, and could cause great harm if CARB fails to coordinate the state and federal climate change programs and ensure that California’s program is determined to be equivalent to the federal program.

Regulatory uncertainty caused by unfinished rules and the prospect of an additional and separate federal program may put a damper on new investments in the state and new hiring, just what we don’t need coming out of a historic recession and record-setting unemployment rates. 

For this reason we urge CARB to agree that allowances will be freely allocated until a broader program including other states is in place. This is not a “give-away” as alleged by some environmental groups – companies will still need to pay for their emissions above an established efficiency benchmark.  The program will still deliver all the emission reductions we need under AB 32. We would simply avoid a new tax on large employers and local governments covered by the program.  

Another way to reduce costs in the program is to allow more options to reduce emissions through off-site reductions, or “offsets”. CARB has assured quality offsets through stringent offset qualification rules so it seems clear we should not impose artificial constraints on an offset market that could provide such great benefits to the state and the environment.

CARB will undoubtedly have much work to do to fill in many of the placeholders even after the CARB Board acts today. 

Many of the critical decisions related to allowance allocation, use of offsets, linkage with other cap- and-trade systems must necessarily be fleshed out in the near future and are very much dependent on actions by the federal government and state and regional partners.  Because some of the assumptions CARB makes today about partners and the availability of offsets for example, may not come to fruition, CARB should commit to revisiting its cap-and-trade regulation in 2011 and make revisions if necessary before 2012.

Further, the regulation contains vague penalty provisions presenting additional uncertainty. Businesses deserve to know the entire scope of the program regarding enforcement issues and be allowed flexible options for compliance. Without direct and conclusive enforcement language, California businesses may be exposed to serious fees and penalties from California’s regulators, thus making the business climate more tenuous.

The success of AB 32 rests on making sure we address as many unknowns as possible prior to the regulation start date.  The AB 32 Implementation Group is committed to working with CARB to further enhance and finalize and the above-mentioned items so California is able to become a model for other climate change policy programs while at the same time not sacrificing our economy and jobs.

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