August 6, 2013 - From the August, 2013 issue

Mary Nichols: California Collaborating With Australia on Pricing Carbon Emissions

In late July, California Air Resources Board Chairman Mary Nichols and Australian Clean Energy Regulator Chair Chloe Monroe signed a Memorandum of Understanding on behalf of their respective countries and agencies, promising to share information about improving carbon market integrity and investing in clean technology. In a speech given at the signing, reprinted here for TPR readers, Chairman Nichols details the principals of California’s cap-and-trade program, noting that the state’s previous emissions regulations not only reduced pollution despite a tripling population, but also grew its clean technology sector to the largest in the nation. Though California and Australia may not be ready to link their carbon markets, Nichols affirms they can partner to share knowledge, experience, and the challenges of cap-and-trade, while encouraging other regions to adopt similarly impactful policies towards climate change.


Mary Nichols

"The cap-and-trade program already builds on this major base of reductions. And it establishes an economy-wide cap on carbon pollution, and sends a clear market signal that investments in cleaner, more efficient ways of doing business will be rewarded."

This is a really exiting time in the world of climate action. There are now dozens of states, countries, provinces, and regions across the globe with programs in place to cut carbon emissions, and many others are moving in this direction.

Collectively, those of us working on this issue are really at the forefront of the global effort to address climate change. Of course, we're also beginning to see the devastating consequences of the warming that's already taking place. As I think people are aware in your own country, in the United States, 2012 was the warmest year ever recorded in United States history. And extreme weather events such as floods and hurricanes and tsunamis and wildfires were again at historically high levels last year.        Many parts of the United States are also still reeling from one of the worst droughts in our nation's history. And perhaps more tellingly, the economic costs of these events are already beginning to mount.

So it's increasingly becoming clear that without significant, and at least to some degree concerted, action to ratchet down on greenhouse gas emissions, this problem is only going to be compounded.

Our program in California builds on decades of leadership in programs that were designed to cut pollution.         

The experience that we had was one of setting very high standards, allowing industry a great deal of flexibility in how to meet those standards, but also insisting that they do meet them despite oftentimes ferocious political opposition. And then, as we move forward, if we really run up against a roadblock in terms of inability to meet the standards because of complete lack of technology being available, we might adjust a little bit on the time deadlines, but not on the stringency of the standards.

And we're taking pretty much the same approach when it comes to global warming, and we're seeing some of the same kinds of results. Because the fact is that California cut emissions of air pollutants by 99 percent twice over. That is, the emissions that are allowable in our state today are 1 percent, or slightly less, of what they were when we first started doing this work in the 1960s. The mountains can be seen most days of the year. The air is many times cleaner than it was.

But at the same time, our population has grown, our number of vehicles has grown even faster, and our economy has grown even faster than that.

Since we began our efforts on global warming, we have also seen an amazing growth in clean technology jobs in California. And we have seen investments grow even faster in the clean-tech sector. In 2011 alone, investment exceeded $3.7 billion, which was more than the combined total of investment in clean technology businesses for the entire rest of the United States.

And this is not an accident. In fact it's directly related to the existence of AB32, our global climate law. AB32 was passed in 2006, and it band-aided, in the state of California, a reduction in greenhouse gas emissions to 1990 levels by 2020.  Subsequent to that, Governor Schwarzenegger and then Governor Brown enacted an executive order that sets a 2050 goal of an 80 percent reduction in greenhouse gas emissions.

Our program is built on a base of mandatory standards and regulations, many of which were already in place and have been delivering results for years, others of which have just come into effect in the last few years, including a low-carbon fuel standard that cuts carbon content of motor vehicle fuels by 10 percent, which is actually a very aggressive goal given the lack of cleaner liquid fuels for vehicles. All of these regulations have as their goal, not only to reduce the greenhouse gas emissions, but also to save consumers billions of dollars in fuel and energy cost.

So the cap-and-trade program already builds on this major base of reductions. And it establishes an economy-wide cap on carbon pollution, and sends a clear market signal that investments in cleaner, more efficient ways of doing business will be rewarded.

A as you've heard, the program is running smoothly. We're now in the process of beginning to link our system with the same, equivalent set of requirements in the Canadian province of Quebec, beginning in January 2014.

The programs cover the largest sources of emissions, including refineries and electricity generators. And because in California we are a major importer of electricity—not only hydro power from the Northwest, but also coal fire power from Nevada and Arizona, and Utah—we take responsibility for the imported electricity and the carbon that's generated from that as well.

Starting in 2015, our program will also cover transportation fuels and natural gas, which is used primarily for heating. We designed our program over a period of years, with extensive input from a range of academic, policy design, and economic experts.

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There are a few basic principles that I do want to highlight about our program. I think the most important one is environmental integrity. The reason why we chose to use a cap-and-trade system as opposed to carbon taxes or fees as the market element of our system, as a way of setting a carbon price, is that we believe that we have the ability to set a hard and declining cap. We believe that is what we need in order to ensure that the program as a whole will meet our emissions reduction targets.

However, the market sets the price under our program. We did allow a price floor to be put in for the auction allowances, but in theory, allowances that are allocated for free, which is what 90 percent of the allowances are, could trade at a much lower rate.          The program was also designed in an effort to minimize leakage. Although California is a very large economy—the 10th largest in the world—the fact is that we're concerned about businesses shifting their operations or actually shifting themselves and their jobs to places outside of California.

And so we built into the system extra allowances for the emissions intensive trade-exposed industries and provided for transition assistance for some that might have a difficulty becoming competitive while they are trying to find ways to reduce their emissions. So we're very clear that that's one of the goals of the program: not to drive businesses out of California.

And we also designed a program to try to protect consumers. The way we did that was to not only allocate emissions allowances for free to our electric utilities, which was the sector that we were most concerned about having run up in prices, but also the entity that regulates the prices and the overall operations of electric utilities. Our Public Utilities Commission is responsible for deciding how the value of those allowances is to be used.

So we gave the electric utilities that serve customers their allowances for free, but we required them to consign those allowances to auction and then to use the revenue from those allowances for the benefit of their consumers. So, as a result of all of this, we are on track to meet our 2020 targets, and we're starting to work on what comes next. But we've also faced our share of challenges in getting these programs up and running, including court challenges, all of which we've won so far, and challenges in things like developing a sufficient supply of truly high quality offsets that we would allow to be used.

But maybe the most important challenge we have faced is from outside California, which is that we never intended this program to be unique. In fact we distinctly prefer not to be operating our own, closed system for carbon reduction. We really want to be part of a larger market.

And so we're very excited that the President in his announcement recently of his own executive action to move forward on climate change, included a very explicit recognition of the states, such as California and the Northeastern states, that have moved ahead with market-based programs and are directive to the US Environmental Protection Agency to develop a regulation for existing electrical generating facilities that takes into account the work that's already been done by states.

We believe that the process of developing this new regulation at the EPA is going to provide a tremendous opportunity for the federal government to create a set of incentives, carrots and sticks, for other states that haven't yet taken action, to take more aggressive action to deal with emissions from their own power sectors.

As states begin to look at the option of either following a very draconian one-size-fits-all federal regulation, or potentially joining with other states in some form of emissions-trading system, even states that today would never dream of adopting a cap-and-trade system are going to be looking in a much more creative way at possibilities for getting involved.

Obviously this is going to take a period of not just days or weeks, but months and years, as this all unfolds. But the conversations are already beginning. And of course businesses, including the utilities in California and the Northeast, are very actively engaged in this conversation and are very eager to see a cap-and-trade program be utilized as the principle vehicle for achieving meaningful reductions in greenhouse gas emissions.

What does this mean in terms of linkage with other places? Well, not much at this point. To be perfectly clear, we are not here pursuing an immediate linkage with Australia in terms of trading emissions credits or emissions allowances back and forth. What we are seeking with Australia is to develop a coalition of states and provinces and countries that understand the benefits of emissions trading, that have worked through many of the technical issues and the economic issues that are involved, and that are willing to cooperate with each other in trying to ratchet up the quality and quantity of efforts that are going on around the globe.

So we believe that we can partner with Australia, not only to share information with each other about how our systems can work better, including things like tracking and monitoring and even enforcement of our requirements where there are companies that operate on a global level, but also so that we can share in the task of involving other countries and states.

That's why I'm here, to pursue some of these conversations, and we're very excited about the opportunity and very happy to have been invited to be part of this effort. ­­

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