March 14, 2016 by Rohan Nongpiur
CaliforniaCarbon.info: Hello Jon, thanks for taking the time to speak to us, it’s much appreciated. I would like to start on the Scoping Plan, and then get on to cover the linkage situation, the California Chambers of Commerce suit against ARB, and then finally the status of EPA’s Clean Power Plan.
CaliforniaCarbon.info: What is your view on the anticipated date and progress of the Scoping Plan, and what do you think of the EJAC negotiations?
Jon Costantino: ARB came out with a November adoption date last week in the most recent Scoping Plan workshop. It certainly looks more like what they originally proposed, and not what the EJAC wanted.
It is certainly an aggressive time schedule. Although, compared to my previous experience in helping to draft the original Scoping Plan, we were starting from scratch with a similar time frame. ARB has the entire framework and thus there are far fewer variables. It therefore makes a lot of sense that ARB wants to move ahead and stay on time in fleshing out all the program’s pieces. But I get EJAC’s position, one should really look at all the factors before the decision is made. Traditionally ARB has tried to do everything in parallel. It makes it a more difficult to comment-respond and comment-respond. You have much less opportunity for this the way ARB schedules things.
CC.info: What do you think ARB has to gain from expediting this process, what do you think their main motives are for really rushing this through at pace? Is it a matter of political momentum, is it anything to do with the CPP, or is it for the benefit of its linkage partners? What are the main drivers?
JC: If they are going to look at leakage and make some adjustments, they have a pragmatic deadline that they have to meet for getting the cap and trade adopted by next July. This is because allowances for the third compliance period go out in the fall, and by then you want your regulated bodies to understand what the process is post 2020. That’s why I think they are expediting everything. You don’t want to go into that third compliance period and not have your post-2020 figured out.
To achieve the 2030 target, you have to get the infrastructure in as soon as possible, the same logic can be extended for 2050. Long-term programs such as Zero Emission Vehicles don’t have enough time for decision turnover. You only have one opportunity, which you don’t want to waste. So if you start backing up from 2050, as incredible as that sounds, and then back up from 2050 to 2030, you then realize we have to start thinking about it now. We have to augment the rules in 2017 for the third compliance period and then the Clean Power Plan will have to be integrated. So ARB really doesn’t have a lot of choice but to figure it out fast, because they can’t scope twice.
CC.info: What is your view on the recently released Ontario regulations, does this affect the Scoping Plan, if so how?
JC: It is all moving ahead, now Ontario has to meet the standards that California has set for equivalency. The Ontario draft regulations were of course designed with California linkage very much at the front of the mind. That’s why you are not going to see California make major changes to the program. Already, every change that ARB wants to make to integrate CPP, or whatever, they have to discuss with the linkage partners. They no longer have the unilateral ability to implement whatever they want. Then once Cap and Trade becomes federally enforceable under the CPP; you have an even wider web of authority. Significant edits to Cap and Trade would then leave ARB in a real tangle.
CC.info: In a few sentences what form do you see the Scoping Plan unfolding into, and where is your attention most focused?
JC: Fundamentally, I think Cap and Trade will look like it does now. The price of the credits, how many credits, what the cap is, those are the key pieces. But it will be more interesting to see the Scoping Plan position on LCFS. If they reaffirm LCFS, are they going to push it to a higher percentage by 2030, or are they going to leave it at 10%. To me that is the biggest unknown. I would say that the current LCFS program is designed as if to continue post 2020, the real question is at what level.
CC.info: So on the topic of complementary measures, there is a feeling that Cap and Trade is slowly losing its role as the backbone of emission reductions in California. Complementary measures (LCFS, EV etc.) seem to be getting more and more emphasis, and are thus beginning to overlap with Cap and Trade. Could that cause problems for Cap and Trade regarding overlap, or is it a necessary and valid thing?
JC: The way the whole thing is structured, ARB implies that Cap and Trade is unfettered, but really it isn’t. The AB 32 program in California is a regulatory program first and foremost, and a market program second. If you are a regulated entity, you have a wide variety of very specific regulations you have to meet. The market allows for the expansion of the program. If it was strictly regulation only then you can’t link with other jurisdictions, you can’t export your programs – that is the real benefit of Cap and Trade. Therefore, in answer to your question, this ought to be seen as a holistic program even if it does contain minor tensions, the Cap and Trade and other regulatory measures are the two faces of ARB’s coin.
CC.info: So do you think that there is no case for emissions that would otherwise occur under cap and trade being reduced by more expensive measures with a higher CO2/MMT abatement cost, such as LCFS?
JC: Well, I would say I don’t know if it counts as a problem for ARB; if the question is ‘will more expensive ways than trading continue to be used to reduce carbon?’ – then the answer is yes. ARB is not going to give up the LCFS, the primary domain of those programs is not the same, even if there is an intersection. They have different policy goals, ARB is not just trying to reduce carbon, they have fuel efficiency goals, advanced biofuel goals, technology goals for ZEV; they can’t let it be as simple as ‘let’s enable the market to identify the cheapest abatement possible’.
It is a very complex web that ARB is weaving, and the price of program is not the number one driver. Take the example of the EJAC, there is the local air quality impact, there is a variety of other policy restrictions that are thrust upon them from the legislature and the Governor. They are walking a massive balancing act. It is a pretty fine line to keep both the economy in good shape and the GHG reductions occurring, that’s why they use adaptive management and do not take every issue head-on. It allows them wiggle room on a few things.
In essence, ARB is a multi-policy regulator, but many Cap and Trade stakeholders are single issue bodies. That’s where the tension can emerge from.
CC.info: There has been quite a lot of focus recently over the California Chambers of Commerce vs ARB case; whether auctions constitute a tax and thus cannot be imposed by ARB. Some commentators were ascribing the case as having a role in the recent price collapse. Do you think these fears are warranted?
JC: If you look at AB 32, it does grant broad authority to ARB, very broad authority. It is a complicated question, does this wipe out other laws and other taxation in case law? Nobody questions whether ARB has the authority to regulate GHG and require the reductions, or even whether it can maintain an emissions market. That is not what is at issue, the issue is the revenue generating component of the program.
We are following this at Manatt, the bottom line is that nobody has a real sense of the court’s timing. The case is potentially huge; auctions are a fundamental part of the program. If ARB can’t auction allowances, they have to go back and revisit this cornerstone of the program. That doesn’t mean you get rid of Cap and Trade, that just means you can’t auction allowances. I don’t know if you have to issue them freely, it just means that maybe you find away of distributing them in a different way. It really depends on the way that the judge structures the order.
CC.info: CPP – what do you think the likelihood of it still going through is?
JC: I am not an attorney so I don’t want to dive into the legal aspect of it; but what I will say is that EPA knew this lawsuit was coming, so it structured the regulation accordingly; they didn’t include an energy efficiency clause for this reason. Even if you win, they might strike down something you think is key, it is rare that anybody is going to have a complete victory or a complete failure. When ARB ‘lost’ the original Scoping Plan lawsuit, the remedy was to go back and redo the environmental analysis not throw away the Scoping Plan. Just because you lose in court does not you mean you lose the war, you may have just lost the battle.
If the question is ‘do I think the CPP, is some form, will eventually be law and implemented?’, then I think the answer is yes.
CC.info: But you think it could be injured in those legal battles, and then perhaps stagger on ‘maimed’ to a certain degree?
JC: It certainly could be, it could be delayed, or one component or the other gets struck down. I wouldn’t want to speculate which part or what aspect. Just because they might think that one thing about it which needs to be fixed or tweaked or one aspect is found unconstitutional, that doesn’t mean the whole thing is. And we have already had the ruling that GHG are air pollution, and ARB as the express and explicit authority to regulate air pollution.
The biggest threat I think is the political threat, but that’s a different question.
CC.info: Past shifting of the accounting periods and borrowing from future emissions allowances in special cases; do you think that there will be any other substantive changes to Cap and Trade past 2020 in California from CPP restrictions?
JC: The big policy issues that I am really curious about we are going to find out on March 29th, ARB is going to have the allocation workshop. What are they thinking about allocations, industrial assistance, cost containment, the price floor and inflator?
These are the major components. The CPP restrictions are really skirting the edges, I don’t anticipate major structural changes to California’s program because of it.
Jon Costantino is a senior advisor at Manatt, Phelps & Phillips, LLP in the Sacramento Government practice group. He manages complex political and regulatory issues for clients in the areas of climate change, clean energy and environmental issues. Mr. Costantino previously served as Climate Change Planning Manager within the Office of Climate Change at the California Air Resources Board, where he oversaw the development and publication of the original AB 32 Scoping Plan. He can be reached at (916) 552-2365 or firstname.lastname@example.org. He will be providing regular submissions on these topics throughout 2016.
Market Outlook: Allowance supply seen declining even in face of fully subscribed auctions
May 1, 2018
Secondary Market Digest – April 2018
May 3, 2018
Regulatory Round-up: Informal workshop on potential amendments to cap-and-t...
May 1, 2018
Secondary Market Digest – March 2018
April 18, 2018