REGULATION:

Calif.'s cap-and-trade overseer steers ambitious program through rough seas

Mary Nichols is a high-powered air pollution veteran who has been a crucial -- some say irreplaceable -- player in California's grand experiment in climate change regulation.

With the world's ninth-largest economy today holding its inaugural auction of carbon allowances, Nichols, the head of the California Air Resources Board, is pushing the button that sets North America's first economywide carbon market in motion.

Nichols herself downplayed the occasion earlier this week. "I'm a little sorry that we don't have any drama for you," she said Monday, a day before the California Chamber of Commerce filed a lawsuit against the auction (see related story). "There's no ribbon-cutting, there's no gong to ring, you can't watch it happen."

But this day has been at least six years in the making and is a harbinger for other states and countries that might someday launch their own greenhouse gas programs.

"With the dormancy of a debate on this in Washington, states will be looked to for more leadership," said Tim Profeta, director of the Nicholas Institute for Environmental Policy Solutions at Duke University, which worked with California on cap and trade. "The state-to-state learning, from what California does, both the good and the bad, will influence what the other 49 states may be willing to do."

Nichols has shepherded the state's emissions reduction goal through a years-long regulatory process, past lawsuits and threats and opposition from all sides.

Appointed after then-Gov. Arnold Schwarzenegger (R) clashed with the previous Air Resources Board chairman, Robert Sawyer, over his approach to air pollution and climate change, Nichols brought experience from U.S. EPA's acid rain trading program and years of environmental policymaking at the state and federal levels.

Would cap and trade have happened without Nichols? "Nope," said Susan Kennedy, an adviser to Schwarzenegger at the time who now serves as a policy adviser at law firm Alston & Bird. "I think it was tenuous enough that I think the Legislature would have killed it."

Firing back at attackers

Environmental justice advocates had pushed hard in the state Legislature for cap and trade to be left out of the state's emissions-reduction tactics in favor of more direct regulation, Kennedy said. After the resulting law, 2006's A.B. 32, specified that a market-based system would be considered to help lower emissions to 1990 levels by 2020, environmental justice groups sued in 2009, alleging that the cap-and-trade plan would allow companies to avoid reducing emissions directly at the source, depriving nearby residents of reductions in other air pollutants that would also occur (Greenwire, June 20).

"It took all of the fortitude Mary developed over decades in the public spotlight to be able to withstand the kind of lobbying from all sides, and it was very, very heavy when the bill was being implemented," Kennedy said.

It is not always a patient fortitude. On Monday, at a power markets conference in San Francisco, Nichols sparred with fellow panelists over the program's potential effect on oil refineries.

"You can't be in favor of A.B. 32 and be opposed to every single possible way of achieving the goal," she told an oil industry representative.

"I just don't think it's fair to pretend that's not a very difficult situation for the refining industry going forward in the state," replied Cathy Reheis-Boyd, president of the Western States Petroleum Association, which includes BP PLC, Chevron Corp., Exxon Mobil Corp. and Shell Oil Co. as members. WSPA is objecting to the inclusion of transportation fuels under the cap starting in 2015 with a declining level of free allowances given to industry, as well as the low-carbon fuel standard, which requires that fuel sellers lower the average carbon intensity of their fuels by 10 percent by 2020.

Nichols also had sharp words for Tesoro Corp., which backed a 2010 ballot initiative to suspend A.B. 32 that failed, 62 percent to 38 percent. The company earlier this year bought a BP refinery in Southern California (EnergyWire, Aug. 14).

"For all that, they got their hats handed to them ... they're back purchasing a refinery in California, which suggests that either they've changed their minds or, I think more likely, what they've done is taken a cold look at the economics and decided that they would make money off of refining in California," Nichols said.

Nichols has been a top air regulator for decades, spanning back to her first term as chairwoman of the Air Resources Board under then-Gov. Jerry Brown from 1979 to 1983. She has had stints as the assistant administrator for U.S. EPA's Air and Radiation program, secretary of California's Natural Resources Agency and director of the University of California, Los Angeles' Institute of the Environment.

Sawyer, who served as ARB head for 18 months before stepping down, also worked with Nichols at EPA. He cited her work with ARB, EPA and the auto industry that resulted in an agreement on greenhouse gas emissions standards for cars and trucks in 2009.

Political clout with both parties

"I suppose [cap and trade] would have happened without her, but she's obviously extremely well-qualified," Sawyer said. "If I'd been asked to name my replacement, I would have picked her."

Environmental economist Matthew Kahn, who overlapped with Nichols at UCLA for several months before she was tapped to head ARB again in 2006, praised her work in academia but said he thinks "her heart is in the action."

"I usually don't believe in a superman theory of history, but I'm sure Jerry Brown really trusts her," he said. "They've had a working relationship for decades."

After Schwarzenegger's term ended in 2010, Brown returned for a third term, and Nichols remained as ARB head, resuming the partnership begun in the 1970s when Brown first named her to the board.

"She is known far and wide as being very smart and very politically shrewd," Kahn added. "I think she continues to be very open-minded about what regulatory tools are needed to solve problems."

Nichols has been clear that going it alone on cap and trade was not her intent.

"We always hoped, of course, when we were designing the program, that it'd be a multi-state, multi-jurisdiction program, and for a while there, we even thought that the federal government might come in and actually take over," she said, harking back to 2009, when the climate bill by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) was progressing through the U.S. House.

Since then, political and economic changes have cut California's seven-state, four-province coalition, known as the Western Climate Initiative, down to just California and Quebec; the two jurisdictions say they plan to formally link markets sometime in 2013.

"The result of all of that is we've had to be more careful, perhaps, than we would have been otherwise to make sure that in every way that we could manage it, this is a program which has minimal impact to start with," she said.

That doesn't jibe with the California Chamber's assessment. In its lawsuit, filed yesterday in Sacramento County Superior Court, the group disputes the state's authority to hold an auction to generate revenue by selling allowances. The lawsuit calls ARB's approach the "most costly way" to regulate carbon emissions.

But an actual reckoning of cap and trade's effects could take years, said one environmentalist. "How well it works, we're not going to know tomorrow, we're not going to know in five months," said Kathryn Phillips, director of Sierra Club California. "It'll be in five years. What has been the upshot: Have they been able to stop any efforts to game it, have they been able to get any real reductions, have they been able to make sure revenues have been spent in a way to ensure that environmental justice communities aren't victimized by this cap-and-trade system? The big questions aren't going to be answered right away."

The next federal EPA administrator?

For a regulator who has been discussed as a possible replacement for EPA Administrator Lisa Jackson, if she chooses to step down, Nichols doesn't seem eager to move on.

"I personally feel I have a unique opportunity, being here in California, to be able to not only advocate for important things at the federal level but also to be part of a demonstration of what's possible," she said in an interview last week. "I think doing a good job here is about the most helpful thing I can do in that regard."

Others said they wouldn't be surprised if she took the job, if it were offered.

"It really depends on whether or not these days there's an opportunity to implement, get some policies done in a second [Obama] term," Kennedy said. "If Congress is willing to go there, then it's a tremendous opportunity."

On the state level, Nichols said she foresees a patchwork of carbon-trading states, as originally envisioned.

"I think there's a very good likelihood that other states will join us in the Western Climate Initiative and also a very good likelihood that RGGI [the Regional Greenhouse Gas Initiative in the Northeast] will decide to shrink the number of allowances and make their program more like a real greenhouse gas reduction program," she said. "I see this as kind of back to where we were a few years ago and we're sort of interrupted by the last congressional election, which was that we had a group of states that for various reasons and with various levels were interested in doing something along the lines of A.B. 32, and now we'll get back to more of that."

On the international level, she said, she sees cap and trade as fitting into a global dialogue that could also include a carbon tax or some other mechanism.

"I think if California is seen as having implemented a cap-and-trade program that was successful, others will take a look at it and it will at least stay alive as a policy tool that other states and countries and provinces might consider, and I think that would be a good thing," she said.

If it is unsuccessful in terms of costs or efficacy, she said, it would have the opposite effect. But either way, the conversation will advance.

"The fact that we're doing a cap-and-trade program may make it easier for people who advocate for a carbon tax to propose that because they can say, 'Look how hard it was to do cap and trade; why don't we just do something simpler, like a carbon tax?' And then they'll go off and work on that, and that would be fine, too."

Reporter Anne C. Mulkern contributed.