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OPINION: California cap-and-trade invests in equity

November 14, 2016 by Billy Hamshaw

Peter Weisberg, Senior Investment Manager, The Climate Trust

(First published by The Climate Trust)

This fall, California solidified an ambitious and deep reduction strategy for greenhouse gas emissions in Senate Bill 32 (a 40% reduction below 1990 levels by 2030). The current targets (a return to 1990 levels by 2020) are being effectively achieved under the present cap and trade system—serving as the starting point to develop a system that can efficiently achieve these deep targets.

Environmental justice groups in California, however, are questioning whether or not the cap and trade system has adequately addressed equity issues. Assembly Bill 197 requires the California Air Resources Board (ARB) to “prioritize… emission reduction rules and regulations that result in direct emission reductions,” while designing policy to meet the steep emission reduction requirements of Senate Bill 32. This calls into question whether or not the cap and trade system can continue to serve as the backbone of the strategy for achieving significant greenhouse gas reductions.

The major questions about the program from an environmental justice perspective are clearly articulated by Cushing et al.’s research brief, A Preliminary Environmental Equity Assessment of California’s Cap-and-Trade Program. Large carbon polluters are more likely to be located in poor communities and communities of color. Environmental justice groups are therefore interested in using greenhouse gas policy to not only reduce greenhouse gas emissions, but also to reduce correlated co-pollutants like particulate matter (which can negatively impact the heath of the people that have to breath the air). Because the cap and trade system allows for trading and offsets, in the words of the paper, “there is little in the design of cap and trade to ensure… localized results.”

The issue, for practitioners in the cap and trade market and for those concerned with climate change, is a lack of time to address added uncertainty around what the future of climate policy will be in California. We need clarity, today, on the mechanisms that will achieve the deep reductions outlined in Senate Bill 32. Long-term certainty is needed to enable private markets to mobilize capital to the new projects and technologies that will deliver the necessary reductions. Questioning the cap and trade system causes investors and lenders, today, to heavily or completely discount the carbon price that the new economy will need to be built upon.

Even before Assembly Bill 197, ARB was required to consider issues of equity when designing its cap and trade system. Health and Safety Code Section 38562(b)(1) directed ARB to cut emissions “in a manner that is equitable, seeks to minimize costs and maximize the total benefits to California.” This concern for equity is reflected in multiple elements of California’s climate policies; policies that go beyond the emission reduction goals of ARB’s cap and trade program. Cap and trade is considered a backstop to this huge suite of complementary policies, like the Renewables Portfolio Standard, which drives direct reductions from power plants, and the Low Carbon Fuel Standard which requires direct reductions from vehicles. California is also using the revenues derived from the cap and trade system to directly invest in disadvantaged communities. A minimum of 10% of the revenues derived from auctioning allowances must be spent directly in disadvantaged communities; a minimum of 25% of these revenues must be spent in a way that provides benefits to these communities.

Containing the carbon price itself is probably the most fundamental equity issue. Carbon intensive goods, such as electricity and transportation fuel, are relatively fixed expenses, regardless of the income of a family. Pricing carbon is therefore potentially regressive. Meeting the incredibly ambitious greenhouse gas goals now required by law in California in the cheapest manner possible is therefore a central equity issue. Environmental Defense Fund, in reviewing ARB’s modeling when designing the original cap and trade system writes, “a California cap and trade program that includes offsets will likely cost less than $20/ton of emissions, while a program without offsets may cost more than $100/ton of emissions.” A $100/ton carbon price, for perspective, would increase California’s gas price by roughly 40%—a blow to disadvantaged communities.

The World Bank just released their 2016 State and Trends of Carbon Pricing Report, which pointed out that taking advantage of carbon trading could reduce climate change mitigation costs by 32% by 2030, and 50% by 2050. Trading both allowances and offsets is key to flexibility, enabling climate policy to achieve emission reductions at the lowest cost. Keeping these costs low is an essential equity issue that environmental justice advocates are well advised not to ignore.

California’s cap and trade system has been piloted and proven. Emissions have decreased, and gross domestic product has grown. The real challenge, achieving deep reductions, is just now beginning. This is the wrong time to redesign the policy and reduce its efficiency at finding low cost emission reductions. The Cushing paper recognizes that, “As regulated industries adapt to future reductions in the emissions cap, California is likely to see more reductions in localized greenhouse gas and co-pollutant emissions.” This is exactly per the design of the cap and trade mechanism. The benefits of patience will pay off for the environment and at-risk communities.

Key to keeping California from backpedaling on its now ambitious reduction requirements is to ensure that carbon prices remain contained to politically palatable levels. Sudden spikes in carbon prices could cause citizens to repeal all climate policy. This reversal would be catastrophic to the work of environmental justice organizations to reduce pollution in disadvantaged communities and to the rest of the world, which looks to California to lead the way in mitigating climate change.

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