Politics & Government

Cap-and-trade market could raise pressure on dairies, jet makers and refineries

California refineries in 2018 are scheduled to lose 25 percent of the greenhouse gas emission credits that the state has been giving them to help them adjust to young cap-and-trade market. In 2014, California refineries released about 67.6 million tons of greenhouse gas emissions. This is the Valero Benicia Refinery in Benicia, on Thursday, June 5, 2014.
California refineries in 2018 are scheduled to lose 25 percent of the greenhouse gas emission credits that the state has been giving them to help them adjust to young cap-and-trade market. In 2014, California refineries released about 67.6 million tons of greenhouse gas emissions. This is the Valero Benicia Refinery in Benicia, on Thursday, June 5, 2014. Sacramento Bee file

California companies that refine gas, make cheese and build satellites may face bigger bills in the state’s underperforming cap-and-trade market very soon.

But their counterparts that extract oil from the earth, turn wood into paper or produce fertilizer are in line for a longer cap-and-trade honeymoon.

The disparities are laid out in a California Air Resources Board plan to wean industries off the free carbon emission credits they’ve been receiving since the state launched its greenhouse gas market four years ago. Those credits help ease companies, and California consumers, into the state’s still-wobbly climate change program.

So far, large California businesses have not had to buy many carbon credits to comply with the state’s greenhouse gas reduction law. The Air Resources Board every year gives them enough allowances to cover 90 percent of their emissions, a number that will be ratcheted down over time.

Industries that the Air Resources Board believes can withstand a growing cap-and-trade bill without shifting operations to other states, such as aerospace manufacturing and large dairies, will start losing their share of free carbon credits in 2018.

The rest will continue receiving enough cap-and-trade assistance to account for most of their carbon footprint until 2021 without buying allowances from other businesses or offsetting their climate change impact in other ways.

The biggest reduction in carbon emission credits will come from petroleum refineries. They accounted for 67.6 million tons of carbon emissions in 2014, and they’re scheduled to lose 25 percent of their free assistance from the state in a year and a half, according to the Air Resources Board.

In 2018, the drop in free carbon credits coupled with a lowered emissions limit for the industry would cost refineries about $369 million, according to the Air Resources Board.

To environmental advocates, the state can’t move fast enough to strike out the cap-and-trade transition assistance it’s been giving away. Those free pollution allowances are valuable, they say, and handing them out at no cost undercuts both the strength of the overall market and the pressure companies should feel to reduce their carbon emissions.

In a May auction, the cost of carbon credits clung to the floor of $12.73 per ton. Just 11 percent of the available allowances sold, suggesting that businesses believe they have enough credits to meet their needs without buying more.

The Air Resources Board has “overcompensated” by giving away pollution credits, said Alex Jackson, an attorney at the Natural Resources Defense Council who is urging regulators to eliminate cap-and-trade assistance.

He called the free assistance a “wealth transfer” because businesses can make money off those credits by selling them to other companies. “On their books, it’s an asset,” Jackson said.

Canneries anticipating a hefty bill

Some industry groups are asking the state to delay what could be a new cost.

Food processors, for instance, want officials to study how slashing its cap-and-trade assistance will affect fruit and vegetable canneries, which also are bracing for an expected hike in natural gas prices.

If the industry’s emissions hold steady from 2014 and its free credits are reduced by 25 percent, food processors would pay another $5.6 million toward the cap-and-trade market.

“If that was the only cost our guys were facing, they would say it’s just a price of doing business, but there are a ton of costs out there, and costs are rising even more to the point where it’s really becoming an issue,” said John Larrea, government affairs director for the California League of Food Processors.

Tomato processor Morning Star, a member of the league with plants in Merced and Yolo counties, is partnering with the California Chamber of Commerce in a lawsuit that challenges parts of the cap-and-trade program. A state appeals court is expected to rule on the case later this summer.

According to the Air Resources Board plan, approved in 2014, aerospace manufacturing is scheduled to take one of the steepest cuts in cap-and-trade assistance.

Those businesses are slated to lose half of the free carbon credits they would receive if the Air Resources Board continued delivering a full share of cap-and-trade assistance to companies such as Lockheed Martin, Northrop Grumman and Boeing. The industry employs about 74,000 people in the state, according to the Labor Market Information Division.

Boosters argue that the potential new cost, although fairly small, could factor into decisions major Southern California employers are making about where they want to do business. At projected prices, allowances for half of the 101,000 tons of carbon emissions that aerospace manufacturers released in 2014 would cost about $1.1 million.

“This is a terrible idea that only helps other states lure those jobs and investments away from California,” said Dorothy Rothrock, president of the California Manufacturers and Technology Association, which represents some of the state’s defense manufacturers.

Free credits go to companies that might move

Although critical of the cut in assistance, her organization supports cap and trade, which gradually compels businesses to reduce their carbon emissions and allows them to buy pollution credits in auctions. Over time, the state lowers the overall limit for carbon emissions, creating scarcity in the market and driving up the cost of participating in it.

The looming cliff for industry cap-and-trade assistance dates back to the program’s creation, when lawmakers directed the Air Resources Board to account for the possibility that California’s cap-and-trade system could end up raising emissions outside the state if a California company relocated to avoid the cost of the carbon market, or if customers bought more products from out of-state-sources.

The Air Resources Board studied how a given industry might respond to the new costs of cap and trade and how companies considered low relocation, or “leakage,” risks would be the first to shed their transition assistance.

Chris Busch, director of research at the San Francisco-based Energy Innovation think tank, said the state’s growing economy is one signal that the Air Resources Board has not overburdened industry with cap-and-trade expenses.

“They’re really trying to be quite generous to affected industries, and it is high time” for more businesses to participate in the market with free allowances, he said.

Looking to 2030

Last week, the Air Resources Board released a proposal outlining how it plans to use cap-and-trade to hit more aggressive carbon reduction targets by 2030.

It may face obstacles in carrying out those goals, however. Some lawmakers are questioning whether the agency has the authority to carry out the program past 2020, and an ongoing lawsuit from the California Chamber of Commerce is challenging the state’s ability to raise revenue from the market.

If the program survives, the Air Resources Board intends to continue offering free carbon credits after 2021 as cap-and-trade assistance to some industries. It’s not clear yet how much it would distribute or which industries would benefit.

Mary Jane Coombs, who manages cap-and-trade leakage risks for the agency, said it’s important for the free allowances to be reduced over time.

The state would end up offering “windfall profits” to large companies if it gives away carbon credits to businesses that raise prices on customers but don’t aggressively cut their emissions, she said.

On top of that, some of the industries have assets that could be used to help them generate revenue from cap and trade.

Large dairies, such as Joseph Gallo Farms in Atwater and Fiscalini Cheese Co. in Modesto, have methane digesters that turn manure into electricity rather than emit the greenhouse gas methane. Companies from other industries can contribute to those projects and receive credit from the Air Resources Board for offsetting their carbon emissions.

But Michael Boccadoro, president of the group Dairy Cares, which focuses on California dairy environmental issues, said digesters are prohibitively expensive for most dairies, costing several million dollars a piece.

He’s readying an argument that pushing large dairies into the cap-and-trade market at full cost will drive them out of state. The industry’s biggest players – the ones governed by cap and trade – produced about 570,000 tons of greenhouse gas emissions in 2014. They’d likely face about $3.2 million in additional charges on the market in 2018.

“The dairy industry is a very, very high candidate for leakage,” he said. “If there aren’t dairies here, people will be buying dairy from somewhere else.”

Adam Ashton: 916-321-1063, @Adam_Ashton