The centerpiece of California’s effort to reduce carbon emissions, an auction system for pollution credits known as cap and trade, has faltered badly in the past year. Businesses have bought far fewer credits than expected, depriving the state of an expected windfall for such big-ticket items as high speed rail.
That doesn’t mean the state isn’t making progress in its crusade against carbon, however: Greenhouse gas emissions in the state fell by 9 percent between 2004 and 2014, according to data compiled by the California Air Resources Board. Although more recent statistics aren’t yet available, the air board says it believes emissions are continuing to fall.
These numbers mean the state is on track to meet its target of reducing annual emissions to 431 million metric tons by 2020, the same amount of greenhouse-gas pollution it produced in 1990, said air board spokesman Dave Clegern.
“Emissions are going down,” said Erica Morehouse, a senior attorney with the Environmental Defense Fund. “It’s working at what it set out to do.”
While it’s the most publicized and controversial piece of the climate change effort, cap and trade probably isn’t the main reason why emissions are falling. Instead, experts such as Severin Borenstein, a UC Berkeley energy economist, say much of the credit goes to lesser-known regulations developed by the state in the past decade.
Borenstein said these include the Renewable Portfolio Standard, which requires utility companies to substitute increasing amounts of solar and wind power for electricity generated with natural gas and coal. (Renewables made up 19 percent of the electricity pie in 2013, the latest data available.) Also contributing is an arcane regulation called the Low Carbon Fuel Standard, which uses financial incentives to get transportation fuel makers to use less carbon in their fuels and in the process used to make them.
“You have this whole tapestry of things working together,” Clegern said.
Economic conditions might be another factor. Even though the recovery has been stronger in California than in the rest of the country, Borenstein said business activities – and the resulting carbon emissions – are lower than regulators assumed when they started pulling together regulations a decade ago.
Borenstein said a California law that requires automakers to reduce carbon tailpipe emissions on new cars has had some effect, too. But the impact has been gradual, in part because “the auto fleet turns over very slowly” and most Californians are still driving older vehicles, he said.
The law, which was adopted as the national standard by former President Barack Obama, is at the nexus of California’s fight with the Trump administration over climate change. President Donald Trump last month directed the Environmental Protection Agency to take a fresh look at the rules for vehicles sold between 2022 and 2025 – the period when the regulations are scheduled to get dramatically stricter. Some experts believe Trump not only will roll back the standards on the national level but will also attempt to prohibit California from enforcing the rules on cars sold within its borders. Such a move would surely trigger years of litigation between Sacramento and Washington.
In the meantime, cap and trade remains the most visible element of California’s plan to reduce greenhouse gas emissions to 1990 levels by 2020, as required by a bill signed into law by former Gov. Arnold Schwarzenegger.
It works like this: Hundreds of cement makers, food processors and others are allocated a certain amount of emissions credits, based on their track record, with each credit entitling them to spew a ton of carbon. If they don’t have enough credits to meet their annual needs, they can scale back production at their plants or reduce emissions by installing more efficient generators or other innovations. Their other choice is to buy additional emissions credits, either from fellow polluters who cut their emissions and have excess credits to sell, or through an electronic auction run by the state Air Resources Board four times a year.
Each year, the total amount of available credits decreases by about 2 percent, creating an ever-declining cap on statewide emissions.
Since the market opened in late 2012, companies have spent a combined $4.4 billion on credits at the state’s auctions. Motorists pay, too, because fuel wholesalers buy credits and pass the costs on at the pump, to the tune of about 10 cents a gallon.
But for all the money spent, the auctions have been tame affairs. Credits have consistently sold for the minimum “floor price” – $13.57 a ton at the latest auction in late February. Borenstein and others said those prices are too low to prod companies into finding ways to reduce emissions.
“Every dollar matters, but relative to the whole thing ... it’s not much incentive,” said Chris Rufer, owner of Woodland-based tomato processor Morning Star Co. Rufer said his company, which generates several hundred million dollars in annual revenue, spends about $300,000 a year on emissions credits.
Despite the comparatively low cost, Rufer led a group of plantiffs who sued to kill the auction program, arguing it was an invalid tax. They lost, with a state appeal court dismissing their case on a 2-1 vote earlier this month, but they put a temporary scare into the market. In three of the past four auctions, the state was able to sell only a sliver of the credits it had available. Failure to sell the credits cost the state hundreds of millions of dollars in expected revenue.
On Friday, Morning Star and other plaintiffs announced they would appeal the ruling to the state Supreme Court. That might keep a legal cloud over the market.
Regardless of what the courts say, experts say the market remains burdened with more emissions credits than polluters need.
But that could change.
The Air Resources Board is expected this summer to extend cap and trade another 10 years beyond its scheduled 2020 expiration. And this time, the market might have a lot more teeth.
Under SB 32, the climate change law the Legislature passed last fall, California must reduce greenhouse gas emissions another 40 percent by 2030. As part of that effort, the annual cap on emissions will drop by about 4 percent a year starting in 2020, compared with the current decline of 2 percent, said Jon Costantino, an Auburn consultant who advises companies on complying with the state’s carbon restrictions.
“You double the slope,” Costantino said.
The result almost certainly will be a more vigorous market for emissions allowances. Polluters will probably find it considerably more expensive to deal with the regulations.
“There won’t be enough credits sitting around, and the costs will go up,” Costantino said.