Regulatory Round-up: Cap-and-Trade fate in the hands of Garcia’s AB 378

April 25, 2017 by Billy Hamshaw

(CaliforniaCarbon.info, April 25, 2017)


Adhering to the concerns raised by environmental and social justice groups, Assembly Bill 378 became the front runner bill for cap-and-trade post 2020 this week.

Introduced by Assembly members Burke and Cooper, AB 151 had previously been the focus of attention on continuing the Air Resources Board’s current program, aiming to bring with it some much needed legal certainty to the market’s longer term prospects. Based on recommendations by the Assembly’s committee on Natural Resources last week, however, amendments to AB 151 will exclude language proposing to extend the program, while AB 378 – co-authored by Committee head, Christina Garcia – will adopt provisions to extend a market based system of addressing greenhouse emissions, replacing AB 151 as the key bill for cap-and-trade post-2020.

The revisions to AB 151 come as a tactful approach by the authors, passing the Committee’s first approval yesterday as they met in the state capitol to hear comments on both bills.


Integrating local pollution reductions with cap-and-trade 

Unsurprisingly, AB 378 is the least favorable of the two bills by California’s polluting industries. Environmental justice groups have long contended that the current program has brought sufficient direct emission reductions, particularly within disadvantaged and low income communities. Addressing these concerns, AB 378 has stipulated stricter direct emission reductions, establishing air pollutant emission standards for individual facilities and restricting free allowances to entities that fail to meet these targets. Industry, on the other hand, wishes to see a more flexible system that will enable market forces to find the lowest possible cost of abatement and minimize the program’s impact on the state’s economy.

The constriction of free allowances, or banishment of free allowances all together, could have further reaching impacts. While the bill’s authors may hope that the absence of free allowances to companies failing to meet set air pollutant standards would encourage direct emission reductions, in reality the additional costs of purchasing allowances could be shifted to the consumer, increasing electricity and fuel prices as well as an increased risk of leakages.

In terms of market dynamics, the loss of free allowances could see a higher willingness to pay for CCAs and more prudent trading strategies among larger emitters with increased activity on the secondary market rather than participants relying on allowances acquired from auctions later in the year. With many challenges to overcome before being written into the legislature however, the true effect on the market remains hypothetical at present.

Whilst both the EJ community and industry groups now appear to be on the same page re the role of a market based mechanism to address California’s emissions levels, the clash in approaches raises the question – should “criteria” pollutants and greenhouse gases be covered under the same policy?


AB 151 – the bastion for offsets?

Based on the recent amendments, AB 151 will likely play a more facilitative role to AB 378’s cap-and-trade extension, including important measures such as the role of offsets within the program – a subject unmentioned in AB 378’s current embodiment. Backed by groups strongly opposed to an offset mechanism, the omission of offsets within AB 378 could be perceived as a positive characteristic to the offset industry.

According to CC.info’s emission projections, a theoretical demand of around 615 million offsets would exist between 2015 and 2030 under a maximum 8% usage scenario. Whilst we anticipate actual demand being below this number, the development of new protocols by ARB will be important in generating required volumes and enhancing emission reductions from sectors uncovered by the cap-and-trade program. To guide ARB’s protocol developments, AB 151 has proposed the introduction of a working taskforce and a multi-tiered incentive system that would prioritize domestic offsets as well as those that benefit disadvantaged communities.


Securing a super-majority for Gov. Brown

With both bills now in motion, we can expect to see further details fleshed out over the coming weeks as staff members look to put forward a workable cap-and-trade program capable of securing a two-thirds vote. Securing the super majority needed to qualify cap-and-trade as a legal tax, will not only be important to installing market stability but enabling Gov Jerry Brown to use the revenues gained for purposes beyond GHG reductions.

Speaking to a packed house at the Climate Action Reserve’s North American carbon conference last week, Brown ensured the audience he would be working hard on extending the program in the next several weeks, re-urging the need for essential climate action in light of dwindling federal leadership, should one need further reassurance…

Billy Hamshaw (billy@californiacarbon.info)

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