Comment Log Display

 

December 15, 2010

Clerk of the Board, Air Resources Board
1001 I Street 
Sacramento, California 95814

Via: http://www.arb.ca.gov/lispub/comm/bclist.php

Re: 	Comments on Rulemaking to Consider the Adoption of a Proposed
California Cap on Greenhouse Gas Emissions and Market-Based
Compliance Mechanisms Regulation, Including Compliance Offset
Protocols 

Introduction

	Consumers Union of United States, Inc., publisher of Consumer
Reports®, submits the following comments in response to the
California Air Resources Board (CARB) proposed rule in the
above-referenced matter.

Comments 
Background
Consumers Union (CU) was an active opponent of Proposition 23 and
has advocated for federal climate change efforts to include
consumer protections, including a consumer rebate or dividend from
cap-and-trade revenue.  We have considerable reservations that
local distribution companies (LDCs), particularly investor-owned
utilities (IOUs), can equitably and transparently deliver consumer
benefit to ratepayers once allowances have already been provided to
them.  
CU strongly supports the following components as essential for an
equitable, consumer-friendly climate policy: 1) auction of permits,
2) dividend or rebate for consumers, and 3) enhanced energy
efficiency and other cost-control measures to keep energy bills
affordable, especially for low- to moderate-income households.  The
first two of these components are implicated in the current
proposed rule.   The consumer rebate and auction were important
components of CU’s defense of AB 32 and are essential for consumer
acceptance of and support for climate change policies.
The AB 32 Scoping Plan (December 2008) and the Economic and
Allocations Advisory Committee (EAAC) recommendations clearly
identified the benefits of auctioning permits and using a
significant proportion of the revenue as a direct consumer rebate. 
It is untenable for CARB to now ignore these prior plans and
recommendations and abandon them in favor of pro-industry policies.
 

Recommendations
The proposed cap and trade regulations for electric utilities
provide an excessive number of free allowances and an indirect and
likely ineffective return of allowance value to consumers.  We urge
CARB to include the following recommendations in its final
regulation: 

1)	Increase the percentage of allowances auctioned to emitters and
utilities. 
The California Public Utilities Commission (CPUC) and the
California Energy Commission (CEC) recommended to CARB a transition
to 100 percent auction for the electricity sector by 2016.   It is
not entirely clear from CARB’s Proposed Rule § 95870(c)(1) and
Table 9.2 what percentage is being freely allocated versus
auctioned, but it appears to be a far cry from 100 percent by 2016.
  Although it is less efficient and transparent, it seems
reasonable for CARB to start with some free allowances at the
outset and increase the auction percentage over time in order to
ease anxiety over the transition and allow utilities adequate
adjustment time to adjust to new emission constraints.   However,
for reasons of planning certainty, principles of fairness, consumer
protection, and public support, there should be a clear path
towards auction and dividend in the electric sector.  
While the impact of AB 32 on specific utilities (LDCs) and
industries will vary significantly, giving away allowances outright
is not the most equitable or efficient mechanism for distributing
allowances.  Free allocations to emitters decrease the revenue
available to be returned directly to consumers, and an efficient
allocation system is important for lowering the overall costs of
the program.  Giving away excessive free allowances creates a
windfall for polluters at worst and provides an inefficient
allocation at best.    In its recommendations to CARB, the Market
Advisory Committee (MAC) identified “reducing the cost of the
program to consumers, especially low-income consumers,” and
“avoiding windfall profits” as important principles to be followed
in the implementation of AB 32, with which CU enthusiastically
agrees.   Based on these principles, MAC recommended to CARB “that
California avoid windfall profits, where they would occur, by
limiting the free allocation of allowances.”   The EAAC report also
recognizes that free allocations to emitters should be limited to
where emissions leakage is likely to occur and even then, used as a
last resort.   
If CARB cannot estimate with certainty which entities or
end-consumers would be the hardest hit through an auction system,
then it is difficult to see how free allocations solve this
uncertainty—there will still be winners and losers and the
competitive disadvantage of those entities that receive
insufficient allocations compared to those that receive a windfall
from overallocation will still be present.   Free allocations do
not solve this problem, but instead, obscure it and make it more
difficult to determine the level of allowances that entities
actually need and the inequities that arise from the cap-and-trade
program.   
Not only is an auction system an efficient way to distribute
allowances to entities that need them, but it also has important
cost efficiencies for consumers of carbon-intensive goods and
services. Entities that can reduce emissions at a lower cost than
purchasing allowances will make these improvements instead of
purchasing additional allowances.  Consumers benefit from this
market efficiency that drives the lowest-cost emission reductions. 

CARB recognizes that under its proposed rule, some IOUs will have
extra allowances to auction in a secondary market.  Consumers Union
feels strongly that, particularly in the case of IOUs, it would be
more efficient to auction these allowances in the first place and
return most of the revenue directly to consumers.  An LDC
pass-through requires close regulation and detailed analysis of
each LDC’s proposal to ensure the value of allowances is actually
passed through to consumers.  Even under vigilant oversight,
determining the value of “free” allowances and what counts as
“consumer benefit” is not as transparent as issuing direct rebates
and may not be sufficient to counteract the regressivity of pricing
carbon.  
Provided that rebates or dividends are a large percentage of
allowance revenue and are distributed fairly, most consumers,
particularly low- and middle-income consumers will be not
significantly worse off under the new program, and many may be
better off.   Principles of fairness may require additional rebates
to account for particularly large differences in regional impacts. 
Providing additional or larger rebates for consumers most impacted
by the new program will provide more transparent, and likely
larger, relief than providing free allowances to the LDCs and
hoping the benefit will trickle down in an equitable manner. 
Ultimately, the auction and dividend method of distributing
allowances is the most transparent and reliable method for
delivering ratepayer relief from the cap-and-trade program.  
However, given the uncertainties in initiating a new program, a
mixture of free and auctioned allowances may still benefit
ratepayers, as long as the path to full auction is clearly laid
out.  CU strongly urges CARB to formulate a clear path to full
auction by 2016, as recommended by the CPUC and CEC.  

2)	Provide residential ratepayers a direct rebate through lump-sum
payments.
Auctioning allowances and returning a large portion of the auction
revenues directly to consumers are essential for ratepayer
protection.  However, CARB’s current proposal does not dedicate
sufficient revenue to direct consumer rebates nor adequately ensure
consumers will actually receive the benefits promised them under
the proposal.  Equal rebate checks for residential ratepayers (or
at least equal within a LDC service area) are essential to ensure
basic fairness of the program and to protect low- and middle-income
ratepayers from potential increases to electricity prices.  The
EAAC report explicitly recommended dividends (possibly combined
with tax cuts) as the majority use of allowance value because
dividends best serve the twin objectives of fairness and economic
efficiency.
CARB’s utility sector plan includes provisions for a secondary
market for excess allowances distributed to utilities.  Section
95892 directs utilities to use excess allowance value “to reduce
the costs of AB 32 policies on their ratepayers,” for “ratepayer
benefit” and “for protection of electricity customers and for other
AB 32 purposes.”  As outlined in the first recommendation above, CU
ardently supports a direct consumer rebate as opposed to an
LDC-pass through.  However, if CARB insists on routing consumer
benefit through LDCs, Consumers Union strongly believes that a
direct consumer rebate or “lump-sum transfer” should be the only
allowable use of these funds.   
The AB 32 Scoping Plan (December 2008) is filled with excellent
recommendations for cost-effective efficiency programs and
standards, weatherization efforts, smart growth planning, and
renewable energy research and deployment.  Many of these worthy
efforts will also help defray energy costs for consumers and are
excellent options for use of allowance revenue.  Support for such
programs should be allocated in a transparent, competitive and
efficient process, however, and not be opaquely routed through
LDCs.
Cost-effective efficiency programs and other uses of the allowances
that may “benefit ratepayers” that are administered by IOUs are not
the best use of allowances.  IOUs are often obligated to conduct
such programs irrespective of the AB 32 program; the substitution
effect may occur, with the result that IOUs do the same level of
efficiency programs with no added benefit for ratepayers that are
supposed to be provided by AB 32.  Such substitutions are difficult
to identify, and other failures of transparency are entirely
plausible if utilities are given leeway on “ratepayer benefit.” 
Theoretically, the CPUC could prevent such abuses, but it is much
cleaner and more transparent to provide the entire allowance
auction value directly to consumers in a lump sum and then keep
efficiency and other programs separately addressed through
independent allowance allocation (in the case of non-IOU
recipients) or ratemaking or other CPUC proceedings (in the case of
IOU-sponsored programs).  
In addition, many consumers will not realize the significance of
the on-bill rebate unless it is clearly identified as a reduction. 
A separate dividend check would be the clearest and fairest option
for consumers, even if such a check is included in the same
envelope as the electricity bill.  A lump-sum payment will preserve
the economic signals intended to reduce energy use and emissions
while helping consumers afford increasing energy bills.    

Conclusion

	For the above reasons, Consumers Union urges CARB to consider
these recommendations in its implementation of AB 32.  We
appreciate CARB’s hard work and tireless efforts to ensure climate
change policy benefit the state’s citizens and its environment and
hope that it makes special efforts to ensure fairness to consumers
throughout this process.


Respectfully Submitted,
 
Shannon Baker-Branstetter
Policy Counsel, Consumers Union