Comment Log Display

							University of San Francisco School of Law
							2130 Fulton St.
							San Francisco, CA  94117
December 10, 2010
Chair Mary Nichols and Members of the Board
California Air Resources Board
1001 “I” Street
Sacramento, California 95812

Re: Comments on Proposed California Cap-and-Trade Regulation and
Environmental Justice

Dear Chair and Members of the Board:

	As federal and international efforts to provide a comprehensive
approach to climate change fall by the wayside, it is all the more
inspiring to review CARB’s development of a sophisticated
cap-and-trade program for California.  Although I express concerns
about the degree to which the proposed regulation integrates
greenhouse gas (GHG) and co-pollutant reduction objectives, those
concerns should not be read as a condemnation of this impressive
initiative.  

These comments address the following topics:

•	Reliance on offsets
•	Impact of opt-in facilities on the allowance market
•	Environmental impacts of biomass and biofuels
•	Cap-and-trade and co-pollutants: Concerns
o	Increases in co-pollutants
	Legal interpretation of “prevent any increase”
	Potentially underestimate risk of emissions increases
o	Complement the state’s air quality objectives
•	Cap-and-trade and co-pollutants: Suggestions
o	Mechanisms to maximize co-pollutant benefits
o	Staff’s concerns about these alternatives
•	CARB assessment of co-pollutant impacts 

I.	Reduce Allowable Use of Offsets

	The greater the use of offsets, the fewer the reductions from
covered sectors.  With fewer reductions in the covered sectors,
there is less of an incentive to create more efficient alternatives
and California will lose the environmental and economic co-benefits
of GHG reductions in stationary source emissions.  Rather than
allowing for increased use of offsets, CARB should focus on cost
containment mechanisms that respond to actual, not prospective,
high prices, and that do not undermine incentives for reductions
within covered sectors. 

The Staff Report explains that the percentage of offsets that can
be used to show compliance increased from 4% in the PDR to 8% in
the current proposal to account for the decision to place a larger
number of allowances in the Allowance Price Containment Reserve,
since having more allowances in the Reserve would shrink the
availability of allowances and potentially increase their cost.  

Rather than assuming that greater offset use will be necessary to
contain costs, CARB should limit offsets and increase allowance or
offset supply if and when market conditions demonstrate that cost
containment is, in fact, necessary.  In many environmental
programs, the costs of compliance have ended up lower than
anticipated.  Cost containment mechanisms that respond to actual
prices are preferable.  CARB could rely on the Reserve, or could
begin by allowing 4%, and allow a progressively greater use of
offsets if higher allowance prices emerge.
 
The Staff Report also emphasizes that allowing offsets provides the
benefit of triggering GHG reductions or sequestration that might
not otherwise occur.  In addition, offset projects could generate
their own environmental and economic co-benefits (whether
domestically or abroad).  

The implicit assumption is that these measures would not be
undertaken in the absence of an offset program.  That conclusion
presents a false choice.  Many offset projects, like manure
digesters, are worthwhile.  CARB should explore new requirements in
the agriculture sector to reduce GHG emissions, not require
industrial emitters to subsidize agricultural reductions. 
Moreover, CARB should not allow stationary source emitters to avoid
their own reductions by facilitating reductions or sequestration
that should happen in addition to, rather than instead of, their
own reductions. 

To the extent that the activities contemplated as offset projects
do require external funding, the use of auction revenue would be a
more environmentally sound mechanism for providing the necessary
funding.  Then the projects would provide emissions reductions that
would complement, rather than supplant, stationary source emissions
reductions.

I.	Opt-in Covered Entities

If non-covered facilities “opt-in” to the cap-and-trade program,
they are likely to do so because they can easily reduce energy use
and seek to make a profit selling excess allowances.  CARB needs to
ensure that its provisions for allowing facilities to opt in
address the potential that the facilities could increase the number
of available allowances, dampening the incentive for covered
facilities to reduce emissions.  Just as the cap will be adjusted
when transportation fuels are added to the program in 2015, the cap
may need to be adjusted to account for the emissions associated
with facilities that opt in.

II.	Biomass and Biofuels

In all provisions relating to the burning of biomass and biofuels,
CARB should carefully assess associated co-pollutant and other
environmental implications.  For example, if biomass-derived fuel
sources do not have to account for their GHG emissions, the rule
could create incentives to use biomass that have incidental adverse
environmental consequences.

III.	Cap-and-Trade and Co-Pollutants

Given the acknowledged link between GHGs and co-pollutants, the
state would benefit from integrating its GHG and co-pollutant
reduction strategies and creating a more unified approach to
regulating industrial emissions.

	AB 32 recognizes the connection between GHGs and co-pollutants,
and instructs CARB to develop GHG reduction policies that would not
only reduce GHGs, but do so in a way that “maximizes additional
environmental and economic co-benefits for California, and
complements the state’s efforts to improve air quality.”   Overall,
the scoping plan in general and the cap-and-trade program in
particular will likely lead to improvements in air quality.  That
said, the cap-and-trade program does not include measures to
prevent increases in co-pollutants or optimize the location of GHG
and corresponding co-pollutant reductions.

A.	Concerns

1.	Increases in co-pollutants.  

The California legislature expressed its concern about the
distributional implications of a cap-and-trade program by
explicitly stating that market mechanisms must, to the extent
feasible, be designed “to prevent any increase in the emissions of
toxic air contaminants or criteria air pollutants.” 

My first comment is one of legal interpretation: based on the
language in the Staff Report, the Staff appear to construe the
language “prevent any increase” too narrowly.  The Staff appear to
be interpreting this language to mean that the cap-and-trade
program itself must not “cause” increases in co-pollutant
emissions.   Under this approach, the Staff Report acknowledges
that the cap-and-trade program could, in some instances, create
incentives that could result in co-pollutant increases.  For
example, if a utility relies upon several different generation
facilities, the price signal generated by the cap-and-trade program
could induce the utility to increase production at more energy
efficient facilities.  Co-pollutant emissions could therefore
increase at the more efficient facilities.  

The Staff’s interpretation of AB 32 appears too narrow.  The
language states that the agency is required to “prevent” increases
in co-pollutant emissions, without limiting that obligation to
increases caused by the cap-and-trade program itself.  As the Staff
Report acknowledges, facilities could choose to increase emissions
in order to increase production or expand into a new type of
production.  New facilities could also be built.  To the extent a
cap-and-trade program allows facilities to increase emissions by
buying GHG allowances, the GHG control program would not constrain
co-pollutant increases and could be inconsistent with AB 32’s
requirements.    

The Staff Report also suggests that co-pollutant increases are
extremely unlikely to occur because the burden of New Source Review
requirements and the cost of GHG allowances themselves will
discourage increased emissions.  At the same time, however, the
Staff Report acknowledges that the state’s refineries are likely to
continue to supply areas outside California even if demand for
fossil fuels in California drops.  The Staff Report also
acknowledges that new biorefineries and biomass facilities could be
incentivized by AB 32 implementation measures.  Thus, emissions
increases are a real possibility.  

The case studies in the emissions assessment do include emissions
increase scenarios, evaluating both the possibility that facilities
would increase GHG emissions by 4 percent and the possibility of a
new source in each study area.  The Staff Report reveals that these
GHG emissions increases would lead to small increases in
co-pollutants relative to the baseline scenario.   Moreover, it is
possible that major facility expansions could lead to increases
above 4 percent and that more than one new facility could choose to
locate in certain areas, possibilities not considered by the
assessment. 

The Staff Report also argues that existing air pollution
regulations would keep any co-pollutant increases to a minimum. 
This is not the place to pick apart California’s air pollution
regulations, but it is not clear that they would fully address an
impacted community’s concerns.  For example, even if NSR were
triggered and the facility had to purchase criteria pollutant
offsets to compensate for the increase in criteria pollutants, it
is not clear that the emission reduction credits would come from
the same location as the increases, potentially leading to a net
increase in impacted communities notwithstanding the offset
requirement.  Moreover, offset requirements apply only to criteria
pollutants, not air toxics.  While California’s “Hot Spots” program
provides more attention to local emissions than occurs in most
states, it does not directly prevent increases. 

The Staff Report’s analysis of the impacts of emissions increases
places them in context: the Staff Report analyzes potential
co-pollutant increases under the cap-and-trade program in relation
to the significant decreases in co-pollutants that existing
regulations are expected to achieve by 2020.  The state’s
initiatives to decrease co-pollutants are laudable.  And the
Staff’s implicit point is well-taken: if those decreases are
realized, there is less of a need to use AB 32 to indirectly
accomplish co-pollutant reductions.  Nonetheless, AB 32 states that
the state’s GHG policies should be designed to complement its
efforts to attain air quality standards.  The cap-and-trade
program, as currently designed, does not take that step.

These comments do not dispute that changes in co-pollutant levels
as a consequence of GHG trading reflect the relative stringency of
associated co-pollutant regulation.  If a GHG trade leads to
increases in co-pollutants, it is because the co-pollutant
regulatory program did not prevent those increases.  CARB may
resist the effort to impose co-pollutant goals on its GHG
regulatory program.  But, as noted above, AB 32 explicitly links
GHG and co-pollutant emissions by specifying that the flexibility
of a market-based GHG program not lead to increases in associated
co-pollutants, even if those increases would be permissible under
existing co-pollutant regulations.

2.	Complement the state’s air quality objectives.  

As noted above, AB 32 directs CARB to develop policies that
“complement[] the state’s efforts to improve air quality.”   It is
not enough to prevent co-pollutant increases.  Ideally, the
cap-and-trade program should help achieve air quality standards by
targeting GHG, and associated co-pollutant, reductions in the
state’s most polluted areas.  Not surprisingly, CARB’s Co-Pollutant
Emissions Assessment reveals that greater co-pollutant reductions
benefits would be achieved if all facilities had to reduce their
proportionate share than will be achieved by letting facilities
trade GHG allowances in ways that could maintain or increase
emissions.   While the percentage difference in emissions
reductions is small, the data indicates that the cap-and-trade
program has not been designed to enhance the achievement of air
quality objectives.  

	In addition, the emissions assessment does not evaluate what could
have been achieved if the program were designed to require or
incentivize greater GHG reductions in the state’s most polluted
areas.  The first scenario in all of the report’s case studies
assumes that all facilities in the state reduce by the same amount.
 The report does not analyze the co-pollutant consequences of
achieving greater-than-average GHG reductions in the state’s most
polluted areas.

B.	Suggestions

	In response to the November 2009 Proposed Draft Regulation, I
submitted comments addressing numerous ways in which a trading
program could incorporate co-pollutant reduction objectives (Kaswan
PDR comments).   The comments did not advocate for any one
mechanism, but evaluated the strengths and weaknesses of several
options.   

	The Kaswan PDR comments are incorporated here by reference.  Of
the seven options included in the original memo, I would suggest
focusing on the following four options (options that could be used
individually or in combination): 

(1)	Combine trading with direct regulation (now or in the future);
(2)	Impose individual facility caps for facilities in
heavily-polluted areas;
(3)	Create incentives for greater reductions in heavily-polluted
areas (through differentiated allowance allocation, fees, higher
allowance prices, or enhanced allowance retirement requirements;
and 
(4)	Devote auction revenue to a Community Benefits Fund to help
finance co-pollutant reductions in disadvantaged areas. 

While I will not repeat the analysis of these options in this
document, I will comment on the Staff’s discussion of some of these
alternatives.
 
Alternative Rejected by Staff - Implement Only Additional
Source-Specific Command-and-Control Regulations.  CARB staff
rejected the alternative of replacing the cap-and-trade program
with a direct regulatory program for industrial sources.  The Staff
Report presents a number of convincing arguments for why regulation
should not replace a cap-and-trade program, but did not address the
value of complementing the cap-and-trade program with limited and
targeted regulatory efforts where appropriate.  The Staff Report
expresses concerns about the cost-effectiveness of regulation if
applied to all industries.  But if regulation were used to
complement cap-and-trade only where appropriate, CARB could take
cost-effectiveness into account in deciding whether to impose
regulations.  In determining cost-effectiveness, it is also
important for CARB to consider not only the costs of regulation to
the relevant industry, but also the economic benefits of enhanced
emissions reductions.
 
The Staff Report also observes that regulations would be difficult
to draft given the lack of data on effective emission reduction
mechanisms and the variation among facilities.  However, CARB is
requiring energy audits at industrial facilities, a process that
includes an assessment of associated co-pollutant impacts.  While
current data may be insufficient, the audits could provide a much
stronger basis for identifying cost-effective energy efficiency
mechanisms that could be required at industrial facilities, and
that could achieve both GHG and co-pollutant reductions.

	CARB Staff may be assuming that facilities will adopt
cost-effective reduction strategies in response to the price signal
created by the cap-and-trade program, without the need for
command-and-control regulations.  But industrial investment
decisions are complex.  Inertia, uncertainty about future carbon
markets, concerns about short-term capital expenditures, and other
factors could impede otherwise cost-effective investment in
emission reductions.  If price signals do not end up prompting
cost-effective measures with significant co-pollutant benefits,
then CARB should retain the authority to require appropriate
measures. 

	In addition, if CARB identifies cost-effective GHG emission
reduction measures with particularly significant co-pollutant
benefits,  then it would be consistent with AB 32’s goals to
require those measures rather than relying upon the vagaries of the
market to incentivize them.

	Alternative Rejected by Staff: Facility-Specific Caps.  The Staff
Report expresses valid concerns about a program that applied
facility-specific caps to all facilities.  But the Staff Report
evaluates only the most extreme version of this option.  First,
facility caps could be applied only to facilities in the state’s
most polluted areas.  Second, the impact of facility caps would
depend upon their stringency.  The Staff Report rejects caps that
would require each facility to reduce its proportional share of
emissions.  But a cap would not have to be that stringent.  A cap
that prevented the facility from increasing emissions would
eliminate the risk of violating AB 32’s requirement that the
trading program prevent increases, while still providing
substantial flexibility.  If facility increases are as unlikely as
the Staff Report claims, then such caps could ensure that the
program complies with AB 32 without having a significant impact on
covered facilities. 

	To further AB 32’s goal’s of complementing the state’s efforts to
achieve air quality, facility caps could, however, go farther than
simply preventing increases.  The caps could be set somewhat below
the level of existing emissions.  Such an approach could still be
more flexible than the one that the Staff rejected, because the
level could be set somewhere between current emissions and the full
proportionate share of reductions.

  	The Staff reject facility caps because of their impact on
cost-effectiveness.  But a full assessment of cost-effectiveness
should take into consideration not only the costs of pollution
control, but the benefits of reducing pollution in heavily polluted
areas.  Thus, varying requirements depending upon the benefits of
pollution control could be more, not less, cost-effective from the
state’s perspective. 

	Alternative Rejected by Staff: Restricting Trading in Adversely
Impacted Communities.  Essentially, the Staff Report argues that
existing programs are already doing enough to address pollution in
California, and that trading restrictions on stationary sources
would add only a marginal benefit.  Ultimately, whether CARB thinks
it is necessary or not, AB 32 states that California should use its
GHG policies, including its market mechanisms, to further
co-pollutant reduction goals.

C.	Assessment of Co-Pollutant Impacts

	The proposed regulation states that CARB will monitor the
co-pollutant consequences of the trading program and take further
action as appropriate.  Such monitoring will provide an important
opportunity to assess the program.  However, the report indicates
that such an assessment will occur only once a compliance period –
once every three years.  That appears to be too infrequent to
properly monitor the program’s co-pollutant consequences.

	Ultimately, the state’s commitment to reduce GHGs is likely to
improve co-pollutant levels and redound to the benefit of most, if
not all, Californians.  The state could, however, take greater
initiative in fulfilling AB 32’s invitation to link GHG and
co-pollutant reduction benefits.

	Thank you for the opportunity to submit these comments.

					Sincerely,
					Alice Kaswan
					Professor of Law