Update on California’s cap-and-trade plan

(Dec. 23, 2010) More on California’s recent draft for cap-and-trade regulation.

Now that the California Air Resource Board (CARB) has approved its staff’s draft cap-and-trade regulation—and will now take the next year developing a CA GHG quota allocation scheme—I think you might want to re-read the official CARB and California Public Utilities’ Commission decision report on “cap and trade.”

In agreeing to adopt the staff decision to implement a cap and trade regulation in the state, the CARB officials did not reverse or amend any of the findings they outline in this rather bizarre report, but they did agree to adopt some regulatory recommendations that they criticize in this report.

As I have argued before, the CARB/CPUC see benefits in the cap-and-trade regulation that do not include emission reductions beyond those in their existing Business-as-Usual (BaU) forecast.  They point out that there are many challenges in getting cap and trade right, and the quota regime will not deliver incremental emission reductions at market prices below US$100/TCO2e—which are not possible given the market price cap proposals in the staff’s regulatory recommendation.

But they do not actually itemize or explain any of the benefits of cap and trade in the attached official report.

So, please ask yourselves: what do the state officials see to be the gains achievable through cap-and-trade?

I believe it goes beyond new state tax revenues.

CA will assign allowance-surrendering obligations to all suppliers (producers and importers) of electricity, natural gas and other carbon-intensive products to the state.  Then the state will freely allocate 98% of the CA GHG quota to entities that operate GHG-intensive production and energy distribution operations in the state.

After the rule is in full effect, any entity that imports electricity or natural gas from BC will have to buy CA GHG allowances from CA refineries, manufacturing facilities and power plants.  The official GHG charge assigned to BC electricity exports for 2010 to determine compliance with the state’s current electricity GHG caps is 0.4009 TCO2d/MWh, much more than the 0.020 GHG factor the government of BC promotes.

The CA state officials will use the same methodology they use today to assign a GHG factor to BC electricity exports in the future to determine how many CA quota units the CA importers will have to buy from high-emitting CA refineries to maintain their imports of BC power.  Then there is the tax on natural gas exports.

A handful of CA state officials have communicated to me their confidence that BC Hydro, Powerex and Duke Energy will bear at least 70% of the cost of CA GHG allowances out of BC export sales margins and that these new tariffs on BC energy exports will not result in material increases in CA consumer prices.

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