Calif. greenhouse gas regulators approach a year of living dangerously

Source: Debra Kahn • E&E • Posted: Friday, October 28, 2011

Now that California has authorized and completed its economywide cap-and-trade program for greenhouse gas emissions, regulators plan to spend the next year finding and working out any problems. An array of industries and other potentially covered groups that seek modifications intend to make sure that 2012 will be very busy indeed.

The Air Resources Board approved the bones of a cap-and-trade market last week, capping off two years of rulemaking. It also formally gave regulators and emitters an extra year beyond what was originally envisioned under former Gov. Arnold Schwarzenegger (R). Trading will begin in January 2013 for utilities, refineries and other large industrial emitters.

That will launch the pioneer economywide trading in North America, covering least 600 industrial facilities. By 2015, it will expand to cover distributors of transportation fuel.

As far as the potential regulatees are concerned, there are lots of extremely vital distinctions that remain to be made. Some may seem small. For example, the board passed a resolution last week setting out several lingering issues, including how to deal with waste disposal companies that capture methane and incinerate trash to send energy to power generators.

Waste Management and other companies say they should not be classified as energy companies, but rather excluded from the emissions cap.

And some involve fights among whole regions of the state. Companies that generate electricity to pump water but don’t sell the electricity itself have issues with how allowances are being distributed. Southern California residents require considerably more electricity to get their water deliveries, so their water rates would skyrocket compared to Northern California, water contractors maintain. The resolution commits ARB to figuring out a way to avoid a war between the north and the south.

Then there is the University of California, which wants an exemption for its combined heat-and-power generators. University officials have proposed using 125 percent of the value of the allowances they would have purchased to invest in emissions-reducing projects, if ARB agrees to let them off the hook.

No episode of regulatory infighting would be complete without the U.S. Department of Defense, which has a big footprint in the Golden State. It has argued for an exemption for its cogeneration plants at California military bases, claiming that as a federal agency, it might not be allowed to participate in the emissions market. ARB will figure out how to cover DOD’s emissions by January 2014, according to the resolution.

Missing nuts and bolts — a ‘stress test’

Most of the remaining work is supposed to be noncontroversial compared to the allowance allocations, offset regulations and cap-setting that took place over the last two years. But the nuts and bolts are not all there, either, and many of them are seen as crucial.

“Without the underlying foundation working, the program can’t operate,” said Jon Costantino, a former ARB climate change manager who now represents businesses before the board. “What folks have been talking about for months/years is the policy aspects, but quietly, behind the scenes, all the other work was being done.”

Before the first auction, in August 2012, the state needs to actually create a trading platform and set up a way to monitor trades.

The agency’s solicitations for consultants to build a trading platform reflect California’s expectation of international linkages, with documents requested in French as well as English. ARB is also looking for firms to evaluate the financials of market participants, figure out how to handle foreign currencies in a potentially linked market, train staff and help conduct simulations of various trading scenarios.

“It’s like a stress test — we’re going to run simulations where we raise the cost of fuel very high and see what the model says about certain allocations,” Young said.

The agency has extended the deadline for bids twice; proposals for each of the four tasks are now due Oct. 31. ARB hopes to select firms to do the work by January, Young said.

On the linking front, British Columbia, Ontario and Quebec are still on track to begin trading in 2013, although the other six states that had signed on through the Western Climate Initiative will not be ready, ARB spokesman Stanley Young said. California will enact amendments to the cap-and-trade regulation to include the Canadian provinces, he said.

Avoiding tangles with other regulations

The agency assigned itself another task at the last minute. An adaptive management plan, which came out Oct. 10, requires ARB to adjust the plan if it turns out that cap and trade negatively affects local air quality, creating so-called “hot spots,” or other unintended consequences.

ARB will need to work closely with local air regulators to figure out how to monitor non-greenhouse gas pollutants and potentially tie increases to cap and trade, said Jack Broadbent, executive officer of the Bay Area Air Quality Management District. It regulates air quality in the nine-county San Francisco Bay area.

“This cap-and-trade program comes in, overlaying over an [already existing] relatively robust program in order to protect public health,” Broadbent explained. “These facilities under cap and trade are going to be allowed to meet their obligations in terms of greenhouse gases by potentially buying credits, making changes inside the facility, or some combination thereof. Pretty much every greenhouse gas emission is associated with criteria contaminants, and so you need to make sure there isn’t a problem occurring here.”

Broadbent said they might address the issue through ambient and ground-level air monitors that can catch increases in ozone, particulate matter, nitrogen oxides and other “criteria” pollutants regulated by the federal Clean Air Act. Communicating with the emitters is also critical so regulators can pinpoint the cause of any increases, he said.

“We don’t believe there could be increases, but you just don’t know all the decisions a facility could be making under a cap-and-trade program, because you’re letting go of the whole system and allowing them to operate on their own under a market,” he said. “When you do things like that, you have to make sure you have an adequate system in place to protect public health.”

Another adjustment ARB might make is to allow emitters to adjust the terms of their permits with local air districts to allow the increase of other pollutants, within limits. Broadbent gave the hypothetical example of a company wanting to install energy efficient boilers, which would reduce carbon dioxide but could potentially increase some other contaminants.

But environmental justice groups, which do believe cap and trade will cause localized air quality degradation, say ARB has even more work to do than that.

“There’s no way that adaptive management plan can even pretend to address the concerns that environmental justice advocates have on behalf of community residents in highly polluted areas,” said Alegr√≠a De La Cruz, legal director of the Center on Race, Poverty and the Environment.

“It’s frankly insulting,” she added. CRPE has a lawsuit pending in state appellate court alleging that ARB violated the law that gave it authority to limit greenhouse gases by failing to account for environmental effects of cap and trade.

“The plan was only unveiled recently, so we have some work to do,” Young said. “We’ve got the next year.”