The Confusion About Cap-and-Trade

In “With cap and trade in doubt, key questions go unanswered,” a recent article in Cal Matters, writer Julie Cart described “a scathing bipartisan scolding” by state lawmakers of the California Air Resources Board “over a lack of transparency” with the cap-and-trade program.

Legislators are talking about doing an audit. But lack of transparency may not be the main problem here.

Cart quoted a Legislative Analyst’s Office report about the various programs funded by the Greenhouse Gas Reduction Fund, into which the state’s cap-and-trade money is deposited:

The analyst … found that not all projects are cost-efficient. For example, the usual price in the auctions of reducing one metric ton of emissions is $12.73. Although some of the projects funded by auction proceeds are excellent deals, some cost more than ten times that sum to achieve the same result, according to the report.

The report, which can be downloaded here, includes a chart that shows the cost of greenhouse gas (GHG) reductions per project funded by the cap-and-trade program. It comes up with an average price per ton of $57, based on each program’s projections for how many tons of GHG it will reduce.

The report then adds:

At the most recent auction in February 2016, cap-and-trade allowances sold for substantially less—about $13 per ton.

This sows confusion about cap-and-trade and its true costs. As explained in this earlier post, the cost of allowances in the auction have nothing to do with the cost of reducing a ton of carbon. It’s disingenuous, at best, for the LAO to put these two statements together as if they were related, and unfortunately that’s exactly how the Cal Matters article interprets them.

If smart people misread the statement to mean that the true cost of cutting greenhouse gas emissions is $13 per ton, it’s the fault of the LAO report.

There are other problems with the LAO’s strictly financial analysis. Its focus on the cost per ton of GHG reduction leaves out all the other investment benefits from the Greenhouse Gas Reduction Fund. Those “co-benefits” are required by a number of laws that accompanied A.B. 32, the Global Warming Solutions Act that forms the basis for cap-and-trade. The additional benefits include improving the economy, providing jobs, improving public health, and ensuring investments go to communities that have suffered disproportionately from climate problems.

Tim McRae, Senior Energy Director at the Silicon Valley Leadership Group, writes about one such co-benefit in the Mercury News: California’s economy, which has benefited directly and indirectly from climate investments.

By ascribing a price to emitting carbon pollution, AB 32 puts a cost on waste and inefficiency. Ten years after its passage, the wisdom of this approach is clear.

California is home to more clean technology venture capital than any other state: $27 billion since 2006, when AB 32 became law. More than 500,000 Californians comprise the state’s clean energy economy, working on advanced technologies like biofuels and electric vehicles that place us in the vanguard.

And, he adds:

Last year, Bloomberg crowned California the best state in which to do business, in part due to our proactive approach to modern global challenges like climate change.

And while the auctions have slowed—whether due to uncertainty over the future of cap and trade or to other factors—

California’s program is designed to withstand this ebb and flow. That’s not what’s important about the program, though. Driving the clean energy economy and driving down emissions is what’s important.

That long-term credibility issue he mentions is real, as the current law expires in 2020 and there is disagreement about how to proceed. And at least some of that disagreement is fueled by misunderstanding the purpose of the program. Opponents of climate change policies and regulations on business are quick to take advantage of the confusion.

Assemblyman Adam Gray (D-Merced) recently penned an op-ed in the Modesto Bee calling cap-and-trade a “tragic return on our investment,” saying that

We should be implementing air quality improvement programs to clean up the air, but instead the Legislature and California Air Resources Board are fixated on lofty long-term greenhouse gas reduction programs.

We are missing an important opportunity to fund real priorities that need our immediate attention – like improving the Valley’s air quality and funding long overdue road maintenance and construction throughout the state.

This reads like a willful misunderstanding of the connections between bad air, transportation mode choices, and equitable, livable communities—all targets of cap-and-trade investments. Or Gray is misled by the LAO’s focus on the cost effectiveness of each dollar spent per ton of GHG eliminated, thinking that is the only goal of the program.

And while he’s right that transparency is important, any evaluation of cap-and-trade must account for more than just the cost per ton of emissions reduced.

More on that next week.

  • felixlopezmail@gmail.com

    The editor provides an interesting perspective. The Legislative Analyst Office provides an even more important perspective in their analysis published this past February 2016.

    Review and Assessment – Legislative Analyst’s Office – Feb 2016

    • The “Investment Plan” Lacks the Robust Analysis Needed to Develop Framework for Spending
    • Certain Proposals Lack Details
    • Expected Benefits of Proposals Are Often Unclear or Uncertain

    Recommendations – Legislative Analyst’s Office – Feb 2016
    • Direct the Administration to Provide More Robust Estimates of Benefits
    • Allocate Funds Based on Policy Priorities and Level of Confidence in Outcomes
    • Establish a Committee to Develop a More Robust Investment Plan

    I was born and raised in the San Joaquin Valley – ground zero for environmental and socioeconomic issues. I noticed many locals do not possess knowledge of how to obtain funding. Here below is a quick summary:

    Summary of Legislation – Obtaining Project Funding

    AB 32 requires California to reduce its GHG emissions to 1990 levels by 2020 —with Cap and Trade Auctions via California Air Resource Board.

    AB 1532, SB 535, and SB 1018 – established the Greenhouse Gas Reduction Fund (GGRF) to receive auction proceeds and to provide the framework for how the auction proceeds will be administered; via the Investment Plan, whereby 25% of the proceeds earmarked for disadvantaged communities.

    SB 1018 sets forth the process by which agencies may seek appropriation of those funds (Gov. Code, § 16428.9(a)).

    The Greenhouse Gas Reduction Fund – the Cap and Trade Auction proceeds are deposited in the Greenhouse Gas Reduction Fund.

    The Investment Plan – identifies the State’s greenhouse gas emission reduction goals and priority programs for investment of proceeds to support achievement of those goals.

    SB 375 requires ARB to develop regional reduction targets for GHG emissions from passenger vehicles
    Each of California’s metropolitan planning organizations (MPOs) must prepare a “Sustainable Communities Strategy” (SCS) that demonstrates how the region will meet its GHG targets for 2020 and 2035 through:

    -integrated land use,
    -housing, and
    -transportation planning.

    The adopted SCS plans to date show an increased focus on more sustainable land use and development patterns to reduce GHG emissions, cut air pollution and provide better mobility option

    According the legislation, the Cap & Trade auction proceeds should be invested in following areas:

    –Sustainable communities
    –Clean transportation
    –Energy efficiency and clean energy
    –Natural resources and waste diversion

    SB 1018 sets forth the process by which agencies may seek appropriation of those funds (Gov. Code, § 16428.9(a)). This process should include the following information:

    -Identify the proposed expenditure;
    -Explain how it will further the regulatory purposes of AB 32;
    -Demonstrate how a proposed expenditure will contribute to reducing GHG
    -Cite how the agency considered the applicability and feasibility of other non-GHG objectives
    -Discuss how the Agency will document results to comply with AB 32.

    The amount of funding for projects located in and projects benefitting disadvantaged communities may vary between different programs.

    The detailed descriptions are listed in various Agency investment plans;, types of investments recommended for consideration include target levels of funding to benefit disadvantaged communities to complement the minimum investments in projects located within those communities.

    Agencies that receive funding will be responsible for ensuring that the overall requirements for investments in, and investments benefitting, disadvantaged communities are met.

    Community residents or local governments with jurisdiction in these disadvantaged communities may be well positioned to identify projects

    The projects need to reduce GHG emissions to meet local needs and support community-wide transformation.

    These local governments could serve as conveners for the community to choose project types from a menu of potential projects,

    Need Provide technical assistance within the community, to help local leaders how come up with bonafide projects.

    Citizens and business people need to offer feedback to the public agencies, such as the COGs (Council of Governments) administering the funding for the projects selected by the community

    Thanks for your time.

  • Important reporting, thanks!

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