Battles loom as California cap-and-trade reform kicks off

Source: Debra Kahn, E&E News reporter • Posted: Tuesday, March 6, 2018

California regulators are beginning the process of reforming their emissions trading system in line with changes mandated by state legislators last year.

Lawmakers extended the market to 2030, insulating it from some political and legal hurdles, but also required regulators to make some changes to the program that would kick in after 2020. Now there’s a potential fight pitting industry against environmental groups over the stringency of the post-2020 market.

The extension enacted last year put limits on the amount of out-of-state carbon offsets that can be used, a concession to environmental justice groups that want more in-state benefits. It also directed state policymakers to address a projected oversupply of allowances that is helping to keep prices low. Environmentalists would like the state to cut the supply so that the current excess doesn’t flood the market post-2020, but industry is lobbying to preserve existing supplies.

California’s Air Resources Board is planning to take a conservative approach in both areas, agency staff said at a workshop held in Sacramento on Friday.

ARB is working on amendments to install a series of price “speed bumps” and an ultimate price ceiling, at each of which more allowances would be injected into the market. The price ceiling in 2030, when emissions are supposed to be 40 percent below 1990 levels, would be somewhere between $81 and $150, according to a discussion draft of proposed changes.

Another set of changes to the market would restrict use of offsets that don’t provide “direct environmental benefits in the state,” per A.B. 398, the bill enacted last year to extend the cap-and-trade program. ARB is envisioning a flexible list of criteria to determine whether projects have in-state environmental benefits. Those that are located within the state or adjacent to a body of water that flows into or out of the state would automatically qualify; others could submit monitoring data or other information.

ARB is so far steering clear of any proposals to remove allowances from the market to deal with oversupply, as some economists have recommended (Climatewire, Jan. 3).

Agency staff questioned the concept of oversupply. As long as the state’s emissions are under the cap, having extra allowances on hand should be irrelevant, they said.

Overallocation “seems to refer to the fact that the state is on track to meet the 2030 target early,” said ARB air pollution specialist Carey Bylin. “If we were to reduce the post-2020 caps, it may push the program to the price ceiling sooner.”

Environmental groups said they would prefer that ARB cut the supply of allowances on the grounds that it would be the easiest way to manage prices without disrupting linkages with other jurisdictions. California currently holds joint auctions with Ontario and Quebec.

“Cap-setting is uniquely within the province of California,” said Alex Jackson, legal director of the Natural Resources Defense Council’s California climate project. “It seems like that might be the most straightforward path to dealing with the concern of are we setting a strong enough price signal.”

Representatives of offset developers praised regulators for steering clear of potential legal thickets. They worry that legislative language expressing a preference for in-state benefits could be interpreted to discriminate against out-of-state offset suppliers, potentially triggering a lawsuit.

“Credible challenges could be made to A.B. 398 on its face,” said Nico van Aelstyn, a lawyer representing forestry offset developers and landowners. “I encourage you to stay the course and resist the temptation to lay down a hard and fast rule. … There will be a lot of folks that are wanting hard and fast rules, and that’s where we can get into trouble.”

Industry representatives also had early praise for the state’s plans and urged regulators to avoid reducing allowances. “I’m scratching my head a little bit about the angst and hand-wringing,” BP’s senior director of government and public affairs, Ralph Moran, said of the oversupply discussion. “Some might say that we’re long allowances; I would say we’re short emissions,” he said. “It seems like a First World problem.”

ARB is taking comments on the proposals through March 16, with a second draft of the changes due out in late summer or early fall. The agency is aiming to vote on them by December.