Analysis: California faces risk in carbon gold rush

By Rory Carroll/Published by Thomson Reuters Point Carbon News

WASHINGTON, May 1 – California is putting its reputation as a pioneering
environmental heavyweight on the line as it prepares to launch a carbon market
in eight months’ time.

State regulators are battling the clock, the courts and their own empty
pockets as they prepare to oversee the start of the multi-billion dollar carbon
market on January 1, 2012.

The idea of capping greenhouse gas emissions and providing cleaner companies
with the potential to profit off their success in doing so is not new, but it
has never been tried in the United States on this scale.

“This is by far the most ambitious program to reduce greenhouse gas emissions
in North America, and by some measures the world,” said Franz Litz, a senior
fellow at the World Resources Institute.

California regulators are convinced they have the data and intelligence
necessary to improve upon the system running in the European Union, which has
shown results but has also experienced theft and fraud.

California officials say the market is a key part of implementing a
six-year-old law that requires it to slash its emissions back to 1990 levels by
2020.

California also has the advantage of being a very large state — independent
of the United States it would represent the world’s eighth-largest
economy.

It plans to launch its market in conjunction with the Canadian provinces of
British Columbia and Quebec, and officials hope the market will one day draw in
other U.S. states and perhaps even Europe.

So officials at the state’s Air Resources Board (CARB) are confident it will
have the liquidity necessary to reflect an accurate and predictable
price.

Many businesses hoping to profit from the trading of carbon credits and major
environmental groups agree with the state, saying the market will give power
plants and factory operators the flexibility to decide how to reduce their
output of the heat-trapping gases.

At the same time, they hope the market’s incentives will ignite the ingenuity
of the state’s businesses, which will invent the clean energy technologies to be
sold around the globe like so many Hollywood blockbusters.

But before any of that can happen, state regulators must overcome a series of
challenges, with opponents striking from both the left and right of the
political spectrum.

CHALLENGE FROM THE LEFT

It is no surprise that climate change deniers believe any effort to limit
carbon emissions is foolish.

What is surprising is that the most serious legal challenge to the market so
far has come from the left.

A group of “environmental justice” organizations banded together and
successfully sued the state in March, saying regulators at CARB failed to
adequately consider alternatives to a carbon market.

The state plans to appeal the ruling, and at this point few expect the case
will amount to much more than a headache for the already overstretched state
officials.

Still, the Superior Court judge’s ruling worried many supporters.

“This case does not send a message other than that lawsuits can delay
things,” said Judi Greenwald, vice president of innovative solutions at the Pew
Center on Global Climate Change.

That message might resonate with power companies in neighboring states such
as Arizona and Nevada that send electricity across their borders into California
and would thereby be subject to the regulations.

Peabody Energy, the world’s largest private-sector coal company, said
California’s carbon market would “run afoul of the Commerce Clause of the United
States Constitution” since it would amount to a tax between states.

Although no legal challenge has yet been filed on these grounds, most believe
this is only a matter of time.

California officials have insisted they are on solid legal ground if such a
case came to court.

The individual with the most power over whether the carbon market ever comes
into being is Democratic Governor Jerry Brown, who has been uncharacteristically
quiet on the issue so far.

CARB officials have said that if Brown wants to delay the start of the market
for any reason, he will have the power to do so.

Brown has a decades-long track record as a strong advocate of renewable
energy but has said little about carbon markets.

On April 18, he told reporters he was examining the issue “very
seriously.”

“Very soon I’ll be letting you know where I think we can go on that subject,”
he said, referring to the carbon market.

Those eager for the market are less conflicted.

CRAVING FOR CERTAINTY

“Businesses in California accept that they are subject to a
carbon-constrained future,” said Josh Margolis, CEO of CantorCO2e, an
environmental brokerage that promises to help businesses “turn a waste stream
into a profit stream.”

“What they crave is certainty so they can prepare on an operational and
capital basis. Business’s message to CARB and the governor: ‘Lead, give us
clarity, and let us get the job done’,” Margolis said.

Even if all the court decisions go the state’s way and Governor Brown signals
his support, some wonder whether the task of completing the market’s complex
regulations is more work than state officials can finish on time.

The final set of rules must be sent to the state’s Office of Administrative
Law by October 28 or regulators will be forced to start the entire process
over.

“CARB still has a lot of work to do with setting up the regulations, all the
rules and the infrastructure for the market to function properly,” said Emilie
Mazzacurati, head of North American Carbon Research at Thomson Reuters Point
Carbon.

“CARB may not be able to dot all the I’s and cross all the T’s by the end of
the year, but I think they can still put together enough of the fundamental
infrastructure by year-end that the market could start,” she said.

Even if the market is delayed, most think it will still come on line
eventually and perhaps change the direction of U.S. climate policy.

“For two decades California has been leading the charge on new environmental
regulations that are ultimately adopted nationwide,” said CantorCO2e’s
Margolis.

“This ‘made in California’ market will work. In a herky-jerky kinda way, we
will achieve the required reductions,” Margolis said.

(Editing by Anthony Barker)

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