[This post is follow-up to a David Roberts post from Jan. ’08: “What does California’s climate bill mandate?“]

Sometime later this month, the California Air Resources Board (CARB) will release its draft “Scoping Plan” on implementation of the state’s Global Warming Solutions Act of 2006 (AB 32), which requires that statewide GHG emissions be reduced to or below 1990-level emissions by 2020.

AB 32 also requires that the regulations “achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions.” Furthermore, the regulations must be designed “in a manner that is equitable, seeks to minimize costs and maximize the total benefits to California, and encourages early action to reduce greenhouse gas emissions“.

The law authorizes a variety of regulatory measures, but CARB’s Scoping Plan effort has focused primarily on cap-and-trade, following the precedent set by the U.S. Acid Rain program. Cap-and-trade can be effective at achieving a specific emission target at minimum cost — but how does the requirement for maximum emission reductions fit in with this approach?

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So far, CARB and the various advisory groups and institutional stakeholders involved with AB 32 do not appear to recognize this statutory requirement; they overlook the word “maximum” in their reading.

This perspective is typified by the Market Advisory Committee, a panel of policy experts that Governor Schwarzenegger convened last year to advise CARB on the development of a GHG cap-and-trade system for California. The committee’s report, issued in June ’07, offered 30 specific policy recommendations, the first of which is the following:

In 2020, the emissions cap in a California GHG trading program should be set equal to total allowable emissions under the Global Warming Solutions Act minus projected emissions from sources and sectors not covered by the cap-and-trade program.

This implies that if an uncapped sector like transportation beat the target, the cap would be raised — irrespective of whether a more stringent cap would be “technologically feasible and cost-effective.” Greater emission reductions in the uncapped sector would not result in any further reduction in statewide GHG emissions; they would merely lessen the burden on capped sectors.

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The MAC report neglects the maximum-reduction mandate, perhaps in part because legislative use of the term “cost-effective” differs from the conventional economic definition 1, which relates to cost minimization, not emissions minimization. Should this be a matter of concern? Are the words “maximum technologically feasible and cost-effective” just legalistic verbiage that can be tacitly ignored? As long as the 2020 limit is achieved, does that part of the statute really matter?

The lessons of history suggest that it does matter, as illustrated by the Acid Rain program’s SO2 trading system. A recent analysis of the program estimates its annual benefits in 2010 at $122 billion and costs for that year at $3 billion, about half what it was expected to cost when the program was established in 1990. In view of the program’s 40-to-1 benefit/cost ratio, an investment in SO2 emission reductions commensurate with original cost expectations would have unquestionably been “technologically feasible and cost-effective.” Additional benefits on the order of $100 billion might have been gained, and there probably would have been no need for supplemental legislation to increase the regulations’ stringency if the program had been structured to achieve maximum feasible and cost-effective reductions of SO2 emissions.

The market efficiencies that led to substantial and unexpected cost reductions in the SO2 program could alternatively have been harnessed to achieve emission reductions, by auctioning SO2 emission allowances and imposing an auction price floor at the original price expectation level. Auction revenue could have been disbursed according to the same allocation formula used for free allocation (e.g., a free allowance worth $100 would become a $100 cash disbursement from auction revenue), so from the perspective of regulated entities the auction would be substantially equivalent to free allocation. But the price floor would enable regulated entities to make long-range investment decisions with the assurance that their investments in clean technology will not be undermined by price erosion or collapse.

The same approach would be equally applicable to GHG regulation. In the context of AB 32, policy instruments like a price floor would be responsive to the maximum-reduction mandate. Such instruments would incentivize over-compliance and early action in advance of post-2020 regulations, which will need to achieve substantial carbon neutrality by mid-century. Governor Schwarzenegger has established a long-term target of reducing California’s GHG emissions by 80% below the 1990 level in 2050, and the most recent climate science corroborates the need for emission reductions of at least that magnitude.

The greater short-term costs associated with over-compliance could be dwarfed by the avoided long-term costs of a much more rapid and precipitous reduction in GHG emissions, which may later be required if early action is not incentivized. Thus, the legislative policy goals of maximizing emission reductions and minimizing costs are not in conflict; they are complementary.

CARB has not formally articulated its interpretation of the maximum-reduction mandate, but the draft Scoping Plan to be released this month should give a clear indication of whether CARB has a regulatory strategy for complying with the mandate, not just in a technical, legalistic sense, but by taking regulatory action beyond what CARB would do if AB 32 did not require maximum emission reductions. If CARB does take such action, it may face significant political opposition, because none of the major political constituencies has been lobbying for compliance with the mandate.

There has been only limited support for a price floor, which would be supportive of the maximum-reduction mandate. The Market Advisory Committee encouraged CARB to consider enforcing a price floor. But the committee’s report did not discuss the relevance of a price floor to the statutory requirements of AB 32; it did not include a price floor in its list of recommended policy options; and it did not give a reason for the committee’s equivocation in recommending a price floor.

Most institutional stakeholders have not been promoting a price floor. For example, though NRDC generally supports a price floor (e.g., in the context of RGGI)2, NRDC did not communicate (PDF) its support to CARB in the Scoping Plan workshops. EDF openly opposes (PDF) a price floor. One group that does support (PDF) a price floor is the Climate Protection Campaign.

Unless there is political support for compliance with the maximum-reduction mandate, CARB may be compelled to implement minimalist regulations, similar to the Acid Rain program, that disincentivize over-compliance.

A fundamental question for CARB and the advisory and advocacy groups involved with AB 32 is this: Do they recognize (as the legislature apparently did) that emission reductions beyond the 2020 limit might be feasible and cost-effective; if so, should the AB 32 regulations create incentives for such further reductions; and if not, why did the legislature write the statute to require “the maximum technologically feasible and cost-effective greenhouse gas emission reductions”?


1 See page 8 of the Sweeney Presentation, June 3, 2008 AB-32 Economic Analysis Technical Stakeholder Work Group Meeting. (Note: As of this writing, public comments for the June 3 meeting are not yet posted, but my comments are posted at http://ssrn.com/abstract=1080608.)

2 Email communication from Devra Wang, NRDC, January 21, 2008: “we generally support a price floor and we’ve supported it as part of the RGGI program.”

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