Battle lines emerging in fight to extend carbon caps

By Debra Kahn | 06/16/2016 08:22 AM EDT

Lawmakers working to extend California’s landmark carbon cap have some hard decisions before them.

Lawmakers working to extend California’s landmark carbon cap have some hard decisions before them.

Proponents of cementing the state’s carbon targets into law through 2030 may have to concede parts of their program to opponents or leave their plans open to legal challenge, thanks to a combination of restrictive tax laws and problems with the market.

Backers of S.B. 32, the bill that would reauthorize California’s carbon programs, have not resolved whether the extension of cap and trade — the programs’ centerpiece and backstop authority — would run afoul of a state constitutional amendment. That measure, called Proposition 26, requires a two-thirds vote to raise taxes or fees.


The question supporters face is how much they would have to give up in order to attain the supermajority.

"Two-thirds is the gold standard from a litigation risk standpoint," said Alex Jackson, director of the Natural Resources Defense Council’s California climate program. "But if you’re going to have to be giving major giveaways to get there, that cautions against that being the end-all, be-all."

Senate President Pro Tem Kevin de León (D) didn’t address the issue in remarks on the state budget yesterday but vowed to keep working with Gov. Jerry Brown (D) and members of the Assembly to pass the bill.

"It has to happen," he said. "There’s no other choice. We want a healthy market to exist."

The risk of litigation without a supermajority is a real one. The cap-and-trade program is currently before the state Court of Appeals on a challenge from industry groups that it violates Proposition 13, another, older constitutional amendment that requires a two-thirds vote for just taxes (ClimateWire, May 25).

The original 2006 climate law, A.B. 32, predated Prop 26, but a successor law would not.

A spokeswoman for Brown declined to answer whether he thought a two-thirds vote was required but vowed support for extending the overall cap, as well as cap and trade.

"We will not meet our world-leading clean air and emission reduction targets unless we solidify and redouble our commitment to the state’s cap-and-trade program and climate goals beyond 2020, and we will work hard to get that done," said Deborah Hoffman. "An extension will not only provide market certainty but will ensure ongoing funding for clean energy programs, especially in vulnerable communities."

Supporters say time is of the essence

The current program extends through 2020, so lawmakers have time. They postponed consideration of the bill last year after it failed to get a majority in the Assembly (ClimateWire, Sept. 11, 2015).

They face pressure, though, from carbon market participants clamoring for assurance that the market will persist beyond 2020.

Demand for carbon allowances has recently collapsed, partly due to uncertainty about whether the copious supplies of credits currently available will be in demand after 2020. Along with that collapse has come a steep reduction in the revenue that Brown has come to depend on to fund his high-speed rail project and other causes. The state missed out on $550 million in revenue from unsold allowances in last month’s auction (ClimateWire, May 27).

"If nothing is passed in the Legislature, you’ve got an opinion from legislative counsel saying the program ends in 2020," said Andre Templeman, of the consulting firm Alpha Inception. "If the government wants any auctions to clear anytime between now and next year, they need to pass something now."

The sponsor of S.B. 32 agreed.

"It is critically important, sooner rather than later, to extend our climate targets and put them into statute," state Sen. Fran Pavley (D) said in a statement Monday.

"Businesses have told me time and again that they need market certainty and predictability in order to plan and innovate and succeed," she said. "That’s what SB 32 brings — certainty and predictability that California will build the clean energy economy that finally moves us away from our dependence on dangerous resources like fossil fuels."

A companion bill by Assemblymember Eduardo Garcia (D), A.B. 197, as currently written would require the California Air Resources Board to rank its emission-reduction regulations both by cost-effectiveness and by the reductions in greenhouse gases, criteria pollutants and toxic air pollution they would cause.

Room to compromise on fuel standards?

Environmentalists fear that one of the concessions on the table could be the state’s low-carbon fuel standard, which aims to reduce the carbon intensity of transportation fuels 10 percent by 2020.

They point to a meeting last month by the nonprofit Fueling California, which includes oil companies in its membership and has sought to change the fuel standard in the past. The meeting included representatives from Chevron Corp., Exxon Mobil Corp., Valero Energy Corp., Tesoro Corp. and the oil industry’s main trade group, the Western States Petroleum Association (WSPA).

"I am quite clear on WSPA’s strategy, with the sudden re-emergence of one of its front groups [Fueling CA], and what we know is a policy it loathes," said Susan Frank, director of the California Business Alliance for a Clean Economy, a group of more than 1,000 businesses and trade groups.

CalSTART, a group of clean transportation interests, issued a letter Monday from local transit agencies and alternative fuel companies pledging support for the fuel standard.

The head of Fueling California gave little indication of what the oil companies might want, though. He said he thought the current standard has been working well.

"It’s already been functioning for many years, and it seems to be doing a remarkable job of reducing greenhouse gas emissions and encouraging the use of alternative fuels in California," said group Chairman Bob Sturtz, a former managing director of petroleum for United Airlines and the current vice president of business development for fuel distributor World Fuel Services.

"From my perspective, it’s actually doing what it originally was set out to do," he said.

Tweaks to the policy could include more support for aviation biofuels and fuel from municipal solid waste, he said. "We had some oil companies there who felt this wasn’t on the right track," he said. "For the most part, I think people voiced their support."

The state Air Resources Board, which is in charge of writing regulations to reach the emissions targets, has been proceeding under the authority of an executive order Brown signed last year setting a target of 40 percent below 1990 levels by 2030. Republican state senators commissioned a legal opinion finding that they may need legislative authority beyond Brown’s order (ClimateWire, April 25). While ARB disagrees with the opinion, they "welcome legislative input," ARB spokesman Dave Clegern said.

One idea that has been floated as a solution to both the legislative and market debates would be to tinker with the mechanics of the cap-and-trade market to tighten up supplies, either now or after 2020. ARB could simply reduce the number of allowances sold at future auctions, but regulators could also create an exchange rate between cap and trade and low-carbon fuel standard (LCFS) credits, which would increase supplies in the LCFS market and reduce them in the oversupplied cap-and-trade market.

"I actually see our suggestion as a way to get to a compromise," Alpha Inception’s Templeman said. "We brought it up to WSPA, and we’re trying to get some feedback from them, but we have not gotten feedback. If the oil guys understood how beneficial that proposal is, they would hopefully see that as a way to get a grand compromise in place."