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Carbon Markets in California

Erik Ness

With New York City Mayor Michael Bloomberg, California Governor Arnold Schwarzenegger recently visited the floor of a carbon market at Credit Suisse. Later that day, with his Empire State counterpart George Pataki, Schwarzenegger revealed an executive order spelling out his next steps on California's road to greenhouse gas reductions.

With New York City Mayor Michael Bloomberg, California Governor Arnold Schwarzenegger recently visited the floor of a carbon market at Credit Suisse. Later that day, with his Empire State counterpart George Pataki, Schwarzenegger revealed an executive order spelling out his next steps on California's road to greenhouse gas reductions. In the Global Warming Solutions Act (AB32) the legislature explicitly gave the California Air Resources Board the lead in developing a strategy for reducing the state's greenhouse gas emissions. But Schwarzenegger's new executive order puts California Secretary for Environmental Protection Linda Adams in charge of coordinating state climate change policy. Democrats have charged that the Governor is trying to seize through executive fiat what he could not win legislatively. "This provision was discussed extensively in the negotiations over the bill, and it was agreed that the Air Board, with its worldwide reputation, scientists, engineers, and extensive public process, would oversee implementation" writes State Senate President Don Perata in a letter urging that the Governor rescind the order. Where AB32 counseled CARB to consider market-based tools, Schwarzenegger's order explicitly tasks CARB with developing a "comprehensive market-based compliance program … that permits trading with the European Union, the Regional Greenhouse Gas Initiative [RGGI], and other jurisdictions." During negotiations for the bill, environmental justice advocates argued that a cap-and-trade market solution would expose some communities to increased pollution because older facilities would be able to avoid upgrading their technology through the purchase of carbon credits. The final bill called for study by CARB, public hearings, and the formation of an advisory committee on environmental justice. "The studies haven't been done, the hearings haven't been held, and the environmental justice committee hasn't even been formed," says Sierra Club lobbyist Bill Magavern, who predicts the governor could find trouble with his budget and confirmations should he be re-elected as expected next month. Despite the disagreement over executive reach, CARB is still the central player, and it is a regulatory agency with real teeth and no hesitation to bite. California was regulating air quality before the EPA was formed, so CARB can legally write tougher standards than the federal government. It does so regularly, and in its running battles with the auto industry CARB has hitched its regulatory authority to the power of the California marketplace, transforming the automobile worldwide into a cleaner and more efficient machine. The general industry consensus is that CARB is too regulatory in its approach, and CARB spokesman Jerry Martin does not hesitate to defend the power of regulation and to point out market failures. "It's likely that because of the broad scale of [carbon emissions] that markets will be much more effective, at least with some industries," he allows. "Having said that we need to go out and identify the types of industry that may be best dealt with in a market solution as opposed to a regulatory solution." The work begins with California's emissions registry, which now falls to CARB. The 1100 person agency anticipates adding 100 new engineers and economists as it strives to meet an ambitious timetable. AB32 set a January 2008 target for rules for emissions reporting and a complete plan by January 2011, with enforcement following in 2012. On top of that, Schwarzenegger's order calls for a Market Advisory Committee named by the Secretary for Environmental Protection and reporting to CARB by June 30, 2007 on the design of the market-based compliance program. On the immediate agenda, says Martin, are talks with RGGI and the United Kingdom. "We are in the very early, formative stages," he stresses. "None of us fully understand how this is going to play out. We do have a time frame and some legislative direction. The governor has made a real commitment and expects us to follow through." According to Terry Tamminen, Schwarzenegger's first EPA secretary and long time advisor, the executive order is just one of several fronts in the battle to engage the federal government. Taminen left office a few months ago to peddle a book and work on Schwarzenegger's re-election bid, but he's also been tasked with 'Johnny Appleseeding' climate action with other Western states. Schwarzenegger unsuccessfully tried to prod the Western Governor's Association to action recently, but informal talks continue. "We do believe this will be a failure if it's only California, or if there is a significant delay between California doing this and other states doing this," says Tamminen. No less important than political momentum is trading infrastructure, and Schwarzenegger has also raised the heat here. "It puts some pressure on us to move more rapidly," says Heather Kaplan a climate analyst with Northeast States for Coordinated Air Use Management (NESCAUM). Kaplan is leading development of the Eastern Climate Registry, a coalition of states building an accounting system to track greenhouse gas emissions and abatement strategies. The goal is to allow states to translate carbon apples to carbon oranges if they adopt different carbon reduction schemes. "The states see a real need for some sort of standardization of this across boundaries," says Kaplan. "We're working to develop a common currency." ECR has been working with both the California Climate Action Registry and CARB in a process that now also includes midwestern and western states interested in emissions accounting. "Our intention is to provide accurate, consistent, transparent, and verified data through a really robust accounting infrastructure," she says. "We have high-ranking environmental officials now who are at the table saying 'how can we make this registry meet our need?'" With thirty states now involved, the goal is to be finished in 9 months. The registry is the key that will allow trading between between states, regions, and nations, says Kaplan. Problems within the European Union's Emissions Trading Scheme, she says, are partly because Europe does not have a solid registry foundation. "Every country has developed it own registry," she explains. "There are different levels of rigor. They readily admit that they need more standardization between their registries. They see what we're doing is a really positive step." The investment community is also exhibiting some exuberance, says Jason Patrick, a carbon analyst at Evolution Markets in New York. "There is a lot of excitement around linkage but it remains to be seen how the details will be fleshed out," he says. "Linkage is a good thing because it improves liquidity and allows buyers and sellers of different abatement costs and different market temperament to find efficiency in trading. So the principle is good." Patrick sees market interest from companies doing business in California, and from offset producers who hope to sell to California, but the reality is the market is hardly defined enough to do more than theorize. For example, business interests pushed for a safety valve that would suspend compliance if it becomes too expensive, but that valve is not defined and is left to the discretion of the governor. Peter Fusaro of Global Change Associates in New York is somewhat harsher in his assessment. "The reality is there has been no firm proposal on cap-and-trade," he argues. "Realistically this is not going to make the market until we have some concrete proposals. Right now Schwarzenegger is out there basically making press releases. All of these things are baby steps. Reality is we don't have mandatory caps, we don't have federal standards, and we barely have a market in the US." Fusaro also says the breakdown of electrical markets a few years ago in California has led to some concern that the state "won't be able to design a workable system." "This is the disconnect," says Fusaro. "The politicians don't understand how markets work." Ralph Cavanagh, energy program co-director for the NRDC, is more optimistic about the future of carbon trading in California. "Everyone assumes that if California opens up its markets to other states and countries that we will invest in them. I think it is even more likely that they will invest in us," he says. With 30 years of concentrated effort on efficiency, California has the lowest energy consumption rates in the US. "In an international trading system for global warming pollution the winners are those who can do it at the lowest cost. California is better at reducing global warming pollution than most other places. The more open markets are across borders the more likely that other people will be investing in our reductions rather than vice versa. It's certainly the right kind of competition to be having." Erik Ness (http://erikness.com) is a regular contributor to the Ecosystem Marketplace. He may be reached at erikness@tds.net. First published: October 24, 2006 Please see our Reprint Guidelines for details on republishing our articles.

Please see our Reprint Guidelines for details on republishing our articles.