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Sierra Club California Comment on Scoping Plan Appendix J CEQA
Analysis

The brief summaries in Appendix J, pages J-85-87, of why ARB staff
believes a cap-and-trade approach is superior to carbon fees,
disregard real world experience so far with cap-and-trade.

ARB staff simply asserts (p. J-87), “While a carbon fee and a
cap-and-trade program provide very similar economic incentives to
those covered, a carbon fee does not provide certainty in terms of
the amount of emission reductions that will be achieved. The
cap-and-trade program, on the other hand, which provides a firm cap
on 85 percent of the state’s greenhouse gas emissions, increases
California’s certainty in meeting the 2020 target, and provides a
robust mechanism to achieve the additional reductions needed by
2050.”

Whether it be the problems with RECLAIM in the South Coast AQMD,
or Europe’s bungled attempt at trading, cap-and-trade is no
panacea.  It is much less likely to lead to achieving a firm cap,
compared to a combination of regulations, with financing of
reductions with carbon fee income.

In fact a carbon fee is markedly superior to cap-and-trade for the
following reasons:

1. Such a fee would benefit businesses since a carbon fee would
reduce risks and aid business planning, because the price is more
predictable than the outcome of a cap and trade/auction. 

2. In addition, such a fee would provide a predictable source of
income for the state to put into Scoping Plan implementation.  

3. Under the precedent of the Sinclair Paint case, expenditures of
revenue from carbon fees must be related to the issue of carbon
emissions. On the other hand, auction revenues could be
appropriated by the legislature for any purpose they want,
including deficit reduction, which would have zero impact on GHG
emissions.

4. Fees can be imposed on all carbon sources, rather than only on
the sector of large producers. This accomplishes the following
goals: a) it allows a much lower carbon rate per ton to raise the
same amount of money, b) it distributes the cost burden between all
sectors, c) it insures that the cost rate is low enough that it
will not be disruptive to industries or consumers, d) it provides
equity between sectors. In California a modest fee of $4 per ton on
all the state's emissions (currently about 500 million tons) could
collect about $2 billion in revenue. ARB's planned “cap and trade”
market system accounts for 20% of 174 million tons reduction target
(34.4 million tons). To raise the same revenue from this 34.4
million ton basis would require a carbon auction price over $58 per
ton, a price that is very doubtful given recent experience with
auctions in the US trading at under $5 per ton. As for consumer
impact, a $4 per ton rate would add about 4 cents per gallon for
gasoline, and 0.1 to 0.3 cent per kilowatt-hour for most California
electric utility customers.  (Likely, there would not be a strong
consumer reaction, compared to a $58 per ton price.)

5. Fees also eliminate the “loopholes” of offsets that create many
regulatory and compliance problems, as well as huge potential
environmental justice issues.

6. Fees avoid much of the high transaction costs associated with
auctions. They can be designed to avoid the fate of the auction in
the northeastern US where the bid price for RGGI permits of $3 per
ton barely covered the cost of the auction.

7. Auctions could raise some initial money to benefit the state,
but then market traders who bought the credits have the chance to
resell the credits, thus reaping profits for themselves but not
benefiting the climate.  (For example, traders who bought the RGGI
permits for $3 per ton are now reselling them for over $4 per ton,
but none of those millions of dollars of trading profits are
benefiting the climate.)

8. Offsets would be allowed under cap-and-trade, which require
expensive verification procedures, as well as controversy over
location (in-state, regional, international?).

9. Cap-and-trade creates huge environmental justice equity
problems, which can be more fairly dealt with using a targeted
combination of regulations and financing mechanisms from a carbon
fee.

10.  The bottom line is that the combination of regulations and
financing reduction measures with fee income can be more easily
adjusted to achieve the firm cap.  

We conclude that the language in Alternative 5 wrongly condemns
carbon fees.  Carbon fees are much preferable to cap-and-trade to
achieve the goals of AB 32.

Sierra Club California said to ARB in our Nov. 19 Comments on
Proposed AB 32 Scoping plan that “Sierra Club urges CARB consider
the merits of replacing cap and trade with a carbon fee. CARB has
not given this fee option the attention or study it merits.”

Jim Stewart, PhD, Co-chair 
Sierra Club California Climate-Energy Committee