Comment Log Display

California Air Resources Board
1001 I Street
Sacramento, CA  95812

November 23, 2010

Chairman Nichols and Members of the Board:

 I congratulate you on the culmination of years of work to develop
a regulation that puts in place the world’s most comprehensive cap
on global warming pollution.  The cap and trade regulation
currently before the Board is a major plank in a comprehensive
package of policies that will enable our state to meet its global
warming pollution reduction requirements while bolstering our
booming clean energy economy, creating jobs, cleaning up
smog-forming and cancer-causing air pollution, and maintaining
strong economic growth statewide.  Californians overwhelmingly
support your efforts to enact policies like this to reduce global
warming pollution and clean up our energy supply—as the recent
election made very clear.

Scientists first noticed carbon dioxide buildup in the atmosphere
and its effect on temperatures more than 100 years ago. Since then,
the scientific foundation explaining why climate change is
happening and what we can do to slow it down has been firmly
established. Air bubbles trapped in polar ice cores show that over
the last 10,000 years, carbon dioxide levels in the atmosphere were
stable at around 255 to 285 parts per million. Starting with the
industrial revolution, those levels began to rise and have climbed
to more than 385 parts per million today. This carbon dioxide
absorbs heat from the Earth's surface and re-radiates in all
directions, including back to Earth. The excess trapped heat is now
causing droughts and torrential rains, melting glaciers, triggering
sea level rise and warming the oceans. If the burning of fossil
fuels is not significantly decreased, continued global warming is
expected to pose serious risks to California’s snowpack and water
supply, agriculture and tourism industries, coastal real estate,
and public health, according to scientific analysis compiled by the
California Climate Change Center.1

This summer, 118 Ph.D. economists with expertise in climate and
energy issues warned that the most expensive thing we can do is
nothing. They urged the California Air Resources Board to proceed
in implementing the AB 32 Scoping Plan, stating that “global
warming gases will be best managed through a combination of policy
approaches. Emissions caps combined with a range of regulatory and
market-based implementation mechanisms offer a particularly potent
strategy because they provide clear incentives for changes in
business practices and the development of new technologies.” 2

California leadership in developing and implementing a cap on
global warming pollution will have ripple effects throughout the
nation and the world. Because the California cap and trade program
may become a model for other states and the federal government, it
is important that the program is designed to cost-effectively
maximize emission reductions in the capped sectors. I applaud CARB
for the thorough public process that has led to the proposed
regulation.

Strengths of the Program (as proposed to be adopted)I am pleased to
see that the proposed regulation contains several elements that I
believe will make the program effective. These include:

    * fully auctioning allowances in the transportation sector; 
    * a declining cap that starts at a level less than 2008
emissions and declines 2-3 percent per year to reach 1990 levels by
2020; and 
    * strong enforcement requiring a multiple of 4 allowances to be
surrendered within 30 days for every allowance not surrendered on
time plus monetary fines for further non-compliance. 

Additionally, I support the possibility of crediting emission
reductions from verifiable reductions of tropical forest
destruction and degradation. The current placeholder language on
sectoral crediting helps establish some of the fundamental
principles that will be needed to ensure environmental and social
integrity of this program. However, careful decisions on many more
details, which staff are now considering, will be necessary before
this program can be implemented.

I support the inclusion of the current placeholder language
indicating that a voluntary renewable energy set-aside will be a
part of California’s emission trading program.  Such a mechanism
will provide crucial support for the continued growth in voluntary
purchases of renewable energy in California in the years ahead. 

I believe that one of the program’s strongest features is the $10
per allowance price floor, which escalates 5 percent plus inflation
per year.  This steady price signal will help businesses make
long-term investments in strategies to reduce global warming
pollution.

Recommendations for Additional Strengthening:
There are several areas in which the program can be further
strengthened. We urge you to strengthen the cap and trade
regulation in the following ways:

Commit to maximize the use of auctioning as a method of allocating
allowances.
The value of allowances CARB proposes to freely distribute to the
industrial sector amounts to billions of dollars and will far
exceed the amount needed to address potential emissions leakage
from trade-exposed industries. The economic “dream team” that was
assembled to advise CARB on cap and trade design, the Economic and
Allocation Advisory Committee, stated in its report that
“…relatively little allowance value would be needed under this
mechanism to address leakage.”(p. 43). Many economic research
reports from the US and Europe suggest that leakage risks can be
accounted for through less than 20 percent free allocation.  For
example, Resources for the Future calculates that “…only about
15-20 percent of allowances are needed to compensate
energy-intensive industries, for their loss of producer surplus, so
the huge bulk of allowances could still be auctioned.”3 Stanford’s
Professor Larry Goulder and colleagues find that “under a wide
range of cap-and-trade designs, freely allocating less than 15
percent of the total allowances prevents profit losses to these
most vulnerable industries. Allocating 100 percent of the
allowances substantially overcompensates these industries, in many
cases causing more than a doubling of profits.”4  UCLA Professor
Matthew Kahn and Erin Mansur from Dartmouth College find that
“energy prices are only a significant determinant of locational
choice for a handful of manufacturing industries such as primary
metals.”5  This provides further evidence that 100 percent free
allocation is excessive.

The level of free allocation proposed in the draft cap and trade
rule will result in a huge wealth transfer from California’s
consumers to the industrial sector.  In order to avoid this
magnitude of corporate welfare, some part of this allowance value
should be used to develop and promote low carbon-emitting
industrial processes, as well as other societal benefits such as
assistance transitioning for workers and small businesses.6

CARB should clearly state in the regulation that it intends to move
toward 100 percent auctioning, and leave an opening to do so. One
way to do this would be to build in an adaptive management process
to assess the impact of free allocation on industries and leakage
over time and adjust free allocation as needed. 

Create Dynamic Product Output-Based Benchmarks That Reflect Best
Practices in the Sector
The product benchmarks for industrial pollution sources should
reflect sector-wide progress in attainment of the best practice
technology and should reward early adopters. The current proposal
leaves these benchmarks unchanged for the whole nine years and thus
blunts incentives for adoption of innovative emission reduction
technologies and leaves cost-effective emission reductions on the
table.  Setting aggressive targets pays dividends, as can be seen
in the electric power industry where adoption of the Best Available
Control Technology has achieved a 99 percent reduction in power
plant NOx emissions.

More Clearly Define CARB’s Role in Offset Decisions
We understand that there is a role for qualified third-party offset
registries that are paid by offset developers to assist in managing
the offset program used for compliance with the cap.  However,
because offset registries’ profits are directly tied to the number
of offsets that are verified and sold through their systems, this
may create an incentive to make decisions that favor the offset
developers they work with at the expense of the environmental
integrity of the offset.  Climate registries should not be put in
the position of both promoting and selling offsets (their bread and
butter) while at the same time regulating the offsets market.

CARB, as the regulatory authority in charge of ensuring that
offsets represent real emission reductions, must have a clear role
in key decisions regarding verification and offset acceptance or
denial.  For instance, in Section 95977(e)(2)(C)(xix)(a-c), solely
the CARB Executive Officer should handle petitions from offset
developers disputing Verification Statements, make decisions on
whether the Offset Project Data report meets proper standards, and
make final determinations on resolving disputes.  Section 95980
should allow the CARB Executive Officer explicit authority to deny
any offset proposals that the Executive Officer finds does not meet
relevant offset criteria.

Ensure that Offsets Cannot Be Sold More than Once through Different
Registries
CARB should devise a means of ensuring that the same offset project
is not available for sale through multiple registries throughout
North America and not sold more than once.

Lower the Offset Limit
I, along with dozens of environmental, public health, faith-based,
environmental justice, and other organizations, continue to believe
that the cap and trade program should require the vast majority of
the emission reductions to occur in the state’s heavily-polluting
sectors that are regulated by the program.  An over-reliance on
offsets delays investment in transforming these sectors and denies
California residents valuable co-benefits that come along with
local emission reductions.

Increase Transparency
The public should have access to the type and amount of compliance
instruments surrendered by each entity each time the entity
surrenders compliance instruments for compliance. There should be
sufficient information that is publically available in a timely
fashion to allow the public to review and check compliance, while
keeping price and trade secrets confidential. 
 
Require Allowance Value Allocated to Utilities to Benefit
Ratepayers, Meet the Objectives of AB 32, and Facilitate Emission
Reductions Above and Beyond BAU
I support the requirement that all utility sector auction revenues
be used for the benefit of ratepayers and to meet the goals of AB
32.  If this benefit takes the form of rebates, the rebates should
be limited to residential ratepayers and include all residential
electricity customers within the utility's distribution service
territory. If the benefit takes the form of clean energy
investments, these investments should be made in accordance with
the goals laid out in AB 32.7  We are concerned that the language
in the draft regulations requiring that auction revenues simply be
spent for the benefit of ratepayers “consistent with the goals of
AB 32,” affords utilities insufficient direction and puts allowance
value at risk of predominately subsidizing business as usual (aka
investments that are already required under existing law).

While we appreciate the oversight that the CPUC and local governing
boards of the POUs can provide, we encourage CARB to provide
additional guidance in the regulations to give utilities a better
sense of where they should direct allowance value, and to ensure
uniformity of purpose among the state’s many utilities.  We ask
CARB to give clear guidance to the utilities, as well as the CPUC
and local governing boards, that any allowance values not rebated
to customers but spent on clean energy programs, should be limited
to the following uses, described in more detail below.

Cost-Effective Energy Efficiency
Utilities that use allowance values for clean energy investments
should be required to first invest in cost-effective energy
efficiency.

California’s loading order establishes all cost-effective energy
efficiency as our first priority procurement resource.  Under AB
32, cost-effectiveness is defined relative to the cost of achieving
the emission reductions necessary to meet AB 32’s goal of returning
to 1990 emissions level by 2020.8  As long as energy efficiency can
provide emission reductions at lower cost than other emission
reduction strategies, it should be considered cost-effective. 
Significant energy efficiency potential remains in utility service
territories that may not be cost-effective under a utility
procurement framework, but is cost-effective under AB 32’s
framework; i.e., compared to other available emission reduction
strategies that must be utilized to achieve our 2020 goal.  To
comply with AB 32’s directive to achieve emission reductions at
least cost, and to provide additional bill relief to utility
customers, CARB should require utilities that receive allowance
value to capture additional energy efficiency savings.

Renewable Electricity
If utilities are allowed to use allowance value to invest in
renewable energy resources, CARB should establish general
principles for such investments in accordance with the goals laid
out in AB 32.9 New renewable projects that provide health and job
benefits to Californians should be prioritized. For instance, local
distributed generation, which typically does not require new
transmission capacity and may provide jobs closer to load centers,
should be prioritized. All investments using allowance values to
procure renewable energy should be limited to projects that service
the customers covered by the cap and trade program, and be limited
to the procurement of contracts that will deliver renewable
electricity directly into a California grid, in order to maximize
the environmental and health co-benefits for those customers. 
Finally, renewable energy investments using allowance value should
not count towards any cost cap that is established to limit the
costs of achieving renewable energy procurement requirements that
exist in law. 

Conclusion
 Icommend CARB on its hard work on a first-of-its kind economy-wide
cap on global warming pollution.  The program has made several
important improvements to the program design relative to similar
but less comprehensive cap and trade programs in the Northeast
United States and Europe.  We urge CARB to make some additional
adjustments as outlined above to strengthen the program to make it
even more effective. 


Sincerely,
Llewellyn Ludlow