As California continues to set up its cap-and-trade market, policymakers are considering an even heavier reliance on offsets to limit costs in the event that emission allowance prices soar.
Under one scenario now under consideration, greenhouse gas emitters would be allowed to use offsets instead of permits to cover 100 percent of their emissions under the state's cap, which is set to reach 1990 levels by 2020. Trading is to begin in January 2012.
The Air Resources Board's preliminary draft regulation, issued in November 2009, allows covered firms to use offsets from within California or the United States to meet up to 40 percent of their reduction obligations.
Tim Profeta of Duke University's Nicholas Institute for Environmental Policy Solutions laid out the cost-containment options yesterday in Sacramento. In setting up the country's first economywide cap on greenhouse gas emissions, California faces a "Goldilocks paradox" as it tries to design a cap-and-trade program that could pave the way for a national program, he said. An allowance price that is too high will place a burden on households and businesses, while a too-low price will discourage actual, operational reductions and stymie investment in green technologies.
ARB staff are considering setting price floors and ceilings at which more or fewer cost-containment mechanisms would be let into the market. One of the mechanisms under consideration would be relaxing the limit on offset use, which under current thinking would be capped at 49 percent of an individual emitter's reduction obligation, or 4 percent of overall allowances. Others include releasing extra allowances from a set-aside pool and allowing use of allowances from a future compliance period.
Each of the methods has drawbacks, staff pointed out. Allowing more offsets would reduce the actual emissions reductions within California, while creating a reserve pool or allowing borrowing from future periods could each create a future shortage of permits, driving prices up in the long run. Profeta is also a member of the board of directors of the Climate Action Reserve, the nonprofit set up by California to administer emissions reporting programs and ensure offset integrity.
Environmental groups are opposed
Environmental groups and health advocates opposed the use of more offsets to meet firms' reduction obligations.
"We thought the 49 percent limit ... was already overly generous," said Erin Rogers, California climate policy manager for the Union of Concerned Scientists. "Doubling that to allow 100 percent of the reductions to come from offsets puts the environmental integrity of the program in serious jeopardy."
Instead, Rogers suggested raising the overall cap in the early years of trading to depress prices and lowering it commensurately in later years to meet the 2020 target.
Among utilities, the consensus was in favor of offset-based price relief, although some noted that supply might be an issue.
"We should have a little bit of humility here in terms of the fact that we're not likely to set up a California market perfectly," said Ray Williams, director of long-term energy policy at Pacific Gas & Electric. "One of the opportunities of introducing quality offsets into a price-collar mechanism is you begin the process of linking California to other quality programs."