Cap and Trade, the California Way

Monica Almeida/The New York Times Emissions from a chemical plant nears the Ports of Los Angeles & Long Beach, Calif.Months after federal cap-and-trade legislation died in the Senate and days before California voters will decide on a fiercely fought ballot initiative to deep-six the state’s global-warming-prevention law, state regulators released hundreds of pages of rules on Friday for how the law is to be applied, industry by industry.

With the late-mover advantage of being able to learn from earlier failures — both economic and political, in Europe and in Washington — specialists working with California’s Air Resources Board have drafted proposed regulations intended to cushion the economic impact on the state’s industries but still accomplish the law’s purpose: reducing emissions linked to climate change to 1990 levels by 2020.

That would mean a reduction of about 15 percent, or 273 million metric tons of carbon dioxide or its equivalent, between 2012 and 2020.

This California iteration of cap-and-trade rules comes to a final vote of the Air Resources Board on Dec. 16. The broad-brush elements are familiar: they set an initial ceiling on the amount of climate-warming emissions allowed in the industrial, electricity, transportation and other sectors, then gradually lower this ceiling over the years, while creating emission allowances that can be traded among polluting industries.

The policies were tailored to some extent to accommodate the varying situations faced by the industries. The accounting system is intended to mesh not just with local industry needs but also with the greenhouse-gas accounting carried out by the federal Environmental Protection Agency.

At the program’s inception in 2012, electric utilities will be awarded allowances free of charge that they can then resell to purveyors of wholesale electricity, which are responsible for the amount of carbon-dioxide emissions created in power agencies. State agencies will be able to act as consignment agents. Most of the coal-fired generating plants that supply power to Southern California are in Arizona and New Mexico.

Retail utilities like Southern California Edison, San Diego’s Sempra or Northern California’s Pacific Gas & Electric can use the proceeds from the auctioning of their allowances to give customers rebates for the increased price of wholesale and retail electricity, and possibly also for things like energy-efficiency programs and investments in renewable energy.

The program would not kick in until 2015 for the industrial sector, including the 21 refineries that process crude oil. These account for nearly 60 percent of the industrial sector’s emissions. The allowances would initially be set to match existing emissions levels, and the program is intended to cushion industries and prevent the loss of jobs to states that are not trying to embed the price of carbon dioxide emissions into their goods and services.

“This transition from the current state of the marketplace is designed to be gradual, rather than sudden,” the regulators write in an explanatory section. “To ensure this is the case, staff is proposing high levels of free allocation to all industries deemed to have a significant level of exposure to carbon costs.”

When it comes to refineries, said Tim O’Connor, a lawyer with the Environmental Defense Fund, the group that for two decades has been closely associated with cap-and-trade proposals, the promulgated rules have finessed the complexities of the refinement and distribution markets. “The people that make fuel and the people that don’t make it but do sell it — like the importers — are going to be responsible for the emissions when that fuel is burned in California,” he said.

Industries with particularly difficult technical problems, like cement manufacturing, which produces about 14 percent of industrial greenhouse gas emissions, would get free allowances through 2020 under the proposal in the hope that this economic cushion will keep operations from moving out of state.

The ability to offset overall emissions by contributing to greenhouse gas reductions elsewhere is severely limited in the California proposal. Only four activities — forestry management, landfill management, manure management and destruction of stores of refrigerants — will qualify.

Finally, the proposal sets aside a certain number of allowances in a reserve fund, guaranteeing a set price for them. (Over time, the price rises and creates other, smaller allowances that are set aside for the future, including one envisioning an auction of allowances to be traded in future years. All seem designed to guard against unforeseen shocks.

Derek Walker, the director of the E.D.F.’s Climate Change Initiative, said the proposal was “a real and rigorous environmental program that also is designed to give industry the ability to compete and transition to a lower-carbon future.”

A spokeswoman for the California Chamber of Commerce said that the group’s experts are still reviewing the proposal.

And foes and proponents of Proposition 23, the initiative to repeal the California law that set this rule-making into motion, anxiously await the outcome of the vote on Tuesday.

By FELICITY BARRINGER/NYT
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