Briefing Report: Much Ado About Carbon

Begging the AB 32 Questions
Wednesday, April 11, 2012

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.”
- Frédéric Bastiat, The Law

California’s continued obsession with climate change subjects itself to further economic discontent beyond that which the state has experienced in the last decade.  Legitimate scientific inquiry on carbon or greenhouse gas (GHG) emissions feedback and their questionable impacts on the climate have effectively persuaded other jurisdictions to avoid substantial emission reduction policies, especially if those policies that may impair a fragile economic recovery. In an effort to better understand the Air Resources Board (ARB) execution of AB 32, the California Global Warming Solutions Act (Nunez, Chapter 488, Statutes of 2006)—without accepting the premise of catastrophic anthropogenic global warming—here are scores of probing questions every citizen should ask their elected officials regarding the state’s premier policy concerning climate change, regardless of where they stand on the issue.  These questions are in no way definitive, but rather serve as a catalyst for a more robust policy debate going forward.

California’s Lead

If the California economy represents about 2% of the world’s GHG emissions, why is it assuming a disproportionate share of the financial costs of dealing with climate change?  If “global warming” is a global problem, why is California fundamentally going it alone with no other states following our lead?  If efforts to get a national cap and trade law could not occur with a favorable Congress and a sympathetic President, who believes that the United States is going to follow California down this path with a hostile Congress and a likely new President?

Scoping Plan

Why do emissions have to be reduced to an arbitrary level as of 1990 by 2020?  How accurate are 1990 measurements of emissions to begin with?  Has the ARB conducted a new inventory to quantify the emissions reductions from the discrete early actions? 

If the ARB’s Scoping Plan recognizes that the recession has had a demonstrable impact on emissions in their revised business as usual model, why do they think that restricting more emission in a fully functioning economy will work well with less economic costs?  Given the slow economic recovery and broad concerns on the legality and viability of an auction, would it not be prudent for the ARB to redo the Scoping Plan before proceeding with the cap and trade program?  

Though the capped sector threshold is currently at 25,000 metric tons of carbon dioxide equivalents (CO2e) emissions right now, will the threshold be lowered to possibly include restaurants, dry cleaners, small manufacturers and other similar businesses?

Offset Protocols

While an offset protocol may allow for some flexibility in the market mechanism, is there a fiscally prudent and logistically viable system to definitively verify that offsets are real, permanent, quantifiable, verifiable, enforceable and additional?  Will there be a secondary insurance policy for offsets?  Will capped industries be responsible for bearing the costs of forest fires, pest infestations or other natural acts that spoil an offset in areas that hold these credits?  When is the ARB going to have the Offsets Registry up and running? 

Administrative Fees & Bureaucratic Budgets

Where is CalEPA’s comprehensive and detailed budget, per GC 12892 (f), for those state agencies implementing climate solutions per AB 32?  Have previous ARB budget proposals distinguished between relevant activities and costs in implementing AB 32 and those costs that are separate policies in their own right and unrelated to the specific implementation of AB 32 such as SB 375, the Pavley Standards and the Renewable Electricity Standard? 

Cap & Trade

Is it legal for the ARB to impose an auction that raises revenue for the state?  Is it not AB 32’s stated goal to reduce greenhouse gas emissions, not raise funds?  Will a delay of the first auction—from August to November 2012—allow for full functionality or is it simply a political delay as to not interfere with votes for taxes on the general election ballot?

How does holding back a percentage of allowances provide for the “maximum technologically feasible and cost-effective” method of compliance when supply of credits in the “market” is arbitrarily restricted?  Does this not artificially increase the cost of emission credits?  Could not the ARB reach the AB 32 target level of emissions without the state imposing a revenue raising auction system, but by distributing 100% of free allowances under a declining cap between now and 2020?

For those who are capped, what assurances that this multi-billion dollar market experiment is going to succeed where it has failed so many other places?  Will taxpayers be on the hook if this program fails?  Is cap and trade likely to evolve into a pure carbon tax?

Revenues & Expenditures

Has the administration already put together a preliminary list of eligible programs that can use cap and trade auction revenue?  Will these eligible programs simply be displacing currently budgeted general fund programs?  Where was the public process and ARB staff recommendation to the governor and the legislature on how to spend revenue from the auction of allowances? 

While the ARB may work with the Legislature on allocating auction revenues, will the Public Utilities Commission appropriate its revenues from free allocations outside of the budget process?  How is an allocation of free carbon credits to utilities not a gift of public funds?  Will these increased costs be acknowledged in customers’ bill as a distinct line item? 

Why not delay the expenditure of any revenue from a cap and trade auction until its constitutionality and legality can be established? 

Sinclair Nexus

AB 32 was passed by the legislature on a majority vote, and while relevant authority to enact this measure was given to the ARB, will not any plan that they devise which constitutes an allocation auction be considered a tax increase since it was not approved by 2/3 vote of the legislature?  Does not use of auction revenues fail a basic Sinclair nexus test where the amount payer pays equals the benefits and the purposes for the revenues?  If the revenue from auction supplants current general fund programs and achieves no additional GHG reductions, why would these revenues not be considered a general tax? 

With such legal uncertainty, should the legislature ratify an appropriate revenue proposal as raised in SB 31 (Pavley, 2009) before it failed on the Senate Floor?

Western Climate Initiative

Was not the purpose of the Western Climate Initiative (WCI) to ensure that California businesses and employers were not forced to compete head to head with their actual uncapped competitors in neighboring states?  How many members of the WCI are actively pursuing compatible cap and trade programs?  Has Congress approved the WCI—an international government cooperative—under their authority in the Compacts Clause?

Additionally, why was it necessary to incorporate the WCI (WCI, Inc.) when the ARB can perform the same duties?  What provisions of any Budget Act, AB 32, or any other law authorizes officials of the ARB, the California Environmental Protection Agency, or any other state employee to serve as Directors, Officers, or employees of WCI, Inc.?  Is there not a major conflict of interest having the executive director of the ARB as the chair of an out-of-state corporation which facilitates emission auctions?  Will WCI, Inc. be subject to the Bagley-Keene Act, the California Public Records Act, the Political Reform Act, including the provisions of the Government Code relating to conflicts of interest or regular audits by the State Auditor?  What about the Public Contract Code or the Joint Powers Authority Law?  Will it be subject to laws of other jurisdictions on these subjects which conflict or are inconsistent with these California laws?  Can WCI, Inc. declare bankruptcy?

Oversight & Other Legal Challenges

Since the auction market is virtual, and trading can realistically happen anywhere around the world and there is significant potential for fraud and manipulation in the carbon markets when billions of dollars are at stake, which federal agency will provide oversight to this new and complex program?  Have any federal agencies weighed in on this new market, including the Federal Energy Regulatory Commission, the Securities and Exchange Commission, the Commodity Futures Trading Commission or the Western Area Power Administration?

Is cap and trade exposed to litigation under the Commerce Clause as has been the case with the Low Carbon Fuel Standard?

Cost of Compliance

How is the ARB measuring and reporting leakage and trade exposure of different industries in California?  Will the Renewable Portfolio Standard and other alternative energy programs increase the number of trade exposed industries who are regulated under AB 32?  Will these programs working in tandem exacerbate leakage possibilities? 

Is it not difficult to balance the symbiotic needs of an uncapped agricultural sector with its sister-industry, a capped food processing sector, if only one has to comply with a declining cap?  If food processors are not capable of operating at full capacity at any time a harvest may happen, is it possible that food could rot in the ground or on the trucks? 

How much will public and private universities in California have to pay in compliance costs and for emission credits?  Will their students bear the costs in higher fees and tuition or the state’s general fund?

If utilities use auction revenue to offset the cost of retail electricity, will it distort market price signals, driving the price of generation higher? How will the cost of a carbon allowance charge be reflected in a consumer’s energy/water/tuition invoice?

Do not the costs of AB 32 on the private economy outpace any gains dependent on rent-seeking, graft and government subsidies?  If “green” jobs are growing at a faster rate in other states compared to California, should we re-evaluate job growth as a tenant of AB 32?

Has anyone in the administration seriously considered the unintended, unanticipated consequences of GHG emission reduction mandates?  How many emergency regulations will the governor implement to mitigate any damage?  Should the governor exercise his authority in AB 32 to suspend implementation until the economy recovers?

“Preferred Growth Scenario”

In terms of SB 375 (Steinberg-2008), California’s “preferred growth scenario” and Sustainable Communities Strategies (SCS), are citizens aware of impending inclusionary mandates in their communities?  Are counties and planning organizations actively informing their constituents about the process and its implications?  Will centralizing land use decisions at the regional level—at the expense of local cities—force more expensive land use decisions and make it more expensive to develop with scarce transportation money?  Even if we build on every infill site in the state and double current density levels to accommodate GHG emission reduction goals, will we be able to address the current housing imbalance, let alone provide housing for projected growth? 

High Speed Rail

How can the Governor suggest that cap and trade revenues be appropriately spent on High Speed Rail (HSR)?  Where is the nexus between cap and trade and HSR?  Has anyone considered matching the various SCS proposals required by SB 375 with the proposed rail line for HSR?  How does encouraging more sprawl and travel on HSR reduce our carbon footprint?  Assuming a uniquely high energy demand in moving trains across the state, can the state reasonably produce enough stable electricity to meet HSR’s forecasted need?  Has an analysis been conducted on the impact that HSR will have on the state’s GHG emissions?  Is it possible that HSR could have a compliance obligation under cap and trade if it is proven to be a net carbon producer as it is built out? 


What are the potential costs for allowances for the Department of Water Resources (DWR) and the State Water Project (SWP) under cap and trade?  Why have they been refused any free allocations?  Can costs easily be passed down to ratepayers in light of Proposition 218 restrictions?  Who absorbs those costs if water contractors decide not to increase water rates?  Is this not an unreasonable and inequitable cost burden on water intensive industries and agricultural interests that rely on SWP water when they try to compete with comparable interests in the same industries that do not obtain water from the SWP?  If water purveyors have—or are in the process—of reducing their carbon output to pre-1990 levels, as a sector of the economy distinct and different from other energy generators and retail sales, could their obligation be viewed as complete? 


How is the state going to replace petroleum based energy with other alternatives when solar and wind are intermittent and unreliable, large hydro is shunned, increasing nuclear capacity is nearly impossible and natural gas is necessary for balancing newly preferred alternative energy sources?  Does not AB 32 implicitly require a significant redesign of the power grid as we move from least cost dispatch to least emissions dispatch of electricity? 

Should it not give policymakers pause when Moody's Investors Service reported that California's rules create an emerging risk to the operating costs, competitiveness and growth of the in-state refineries?  Will banked emissions set aside for future use preclude power generators from ramping up during an extreme energy shortage?

Are there similarities between the emerging emissions market and the energy crisis of the late 1990’s?

In the end

What is California’s climate policy going to look like after AB 32 comes to an end in 2020?  Will the statute need to be legislatively extended beyond 2020 to remain in effect?  What if we hit our emission reduction goals before 2020?  Does such success guarantee a “real, verifiable, permanent and additional” net positive change in the climate? 

Has the ARB discounted future knowledge by locking into ideological, long term policies that may prove to be unwise and devastating?  Will the legislature consider reining in the ARB's authority over cap and trade?  Ultimately, if the cost to fight GHG emissions will be far greater than doing nothing, is it wise to pursue such a course?


For more information on this report or other Environmental Quality issues, contact Lance Christensen, Senate Republican Office of Policy at 916/651-1501.