July 26, 2016 - From the July, 2016 issue

CARB’s Mary Nichols on California’s Cap-and-Trade Program & Historic VW Settlement

The California Air Resources Board’s most recent quarterly cap-and-trade auction was the first to result in only a fraction of available permits sold. Detractors used the weak auction results to highlight the program’s uncertain future, whereas advocates touted the state’s success in cutting carbon emissions quicker than expected. To CARB Chair Mary Nichols, who has overseen the leadership of the program since its inception, the auction showed that industries were keeping a lid on carbon emissions rather than buying permits to emit more. Nichols sat down with TPR to discuss the health of the cap-and-trade program, as well as  ongoing efforts to extend California’s climate programs and expand the model to other states. Nichols also addresses the historic enforcement action and settlement with Volkswagen, which CARB led on negotiating.

Mary Nichols

“The VW Settlement was by far the biggest enforcement action that we’ve ever been involved in—since it was the worst case of deliberate flouting of emissions control law that anyone had ever seen. The amount of money secured for consumers, and for remediation of the harm done by these years of violations, is appropriate to the scale of the problem.” -Mary Nichols

After the May cap-and-trade allowance auction produced lower than expected purchases, some voices raised concern in California and globally about the state of California’s  cap-and-trade program. Please offer our readers your perspective on the carbon market?

Mary Nichols: First of all, it was one auction of a series of quarterly auctions in which the state always offers a certain number of allowances for sale. It’s a small fraction of the total allowances in the system. We run these auctions primarily as a way to provide transparency about the price, and also to make sure that there are enough allowances available for everyone who needs them in order to be in compliance with the cap-and-trade program.

In the May auction, we knew in advance that many of the allowances would not be sold. There’s a private market that runs fulltime in parallel with the state auctions, and the price there was slightly below the floor price in the state auction. Investors who previously purchased allowances from auction or in this private market decided to sell their allowances between the February and May State auctions.  Consequently, compliance entities were able to get what they needed there at a lower price in the private market.

That is a good sign, in terms of compliance. We’re seeing in the reporting data that many companies are investing ahead of where they need to in energy efficiency, so they won’t need to buy many allowances. This is good, because of course, the goal of the program is to reduce emissions. On the other hand, the market is affected by uncertainty. In the run-up to this auction, we heard from traders that they are unhappy about the lack of assurance that this program is going to continue beyond 2020.

The state Chamber of Commerce and others have sued to try to invalidate the auction specifically. But the entire program, by regulation, ends in 2020, and there has not yet been any definitive action to reaffirm the 2030 goal and the viability of the cap-and-trade program. There is some uncertainty hanging over the future of the program, and that always has an impact on the market.

Governor Brown has called on the Legislature to enact legislation both to adopt the 2030 target and to reauthorize the cap-and-trade program. Senator Fran Pavley has also introduced SB 32 to extend the program indefinitely. Can you talk about these comments about the certainty issue?

The governor has seen the excitement in the Legislature, and in communities, about the investment plans for the revenue the state has been getting from the cap-and-trade program. He understands that it’s an important element of planning for future activities with multiple benefits—not only reducing dependence on fossil fuels, but also everything from transit-oriented development and affordable housing to the expansion of electric transportation in the state. He’s very committed to assuring a long-term future for this program.

Governor Brown believes, as do we, that we have the legal authority to continue working under AB 32. The language of the bill said that ARB could establish a market program under certain conditions through 2020, and did not specifically say anything about the years beyond that. To say the state’s whole climate program has to stop in 2020, as if we don’t have a problem with climate change anymore, would be a misreading of the statute. ARB is moving ahead with plans for the 2030 target and beyond, and are considering extending—and expanding—the cap-and-trade program.

Still, we have to recognize the challenge in the courts. We’ve won at every step so far, but we haven’t won yet. It would be very helpful if the Legislature would act, preferably with a supermajority, to put this program on permanent, solid footing. California’s cap-and-trade program has seen international success, as evidenced by this month’s meeting of the Prime Minister of Canada and the Presidents of the United States and Mexico. Tell us about jurisdictions joining, or emulating, California’s system. 

Since the accord was signed at the United Nations Conference of Parties in Paris, and to some degree building up to that, there’s been a steady flow of jurisdictions looking to enact pieces of California’s climate program, including cap and trade. We always have to remind people that cap-and-trade is only one element of California’s climate action plan. The cap is certainly an important feature, because it is the overarching guarantee that we will achieve our goals. The trading system was the biggest innovation at the time of its launch, and has been of great interest in other places. 

But the plan also relies to a great extent on a number of very specific measures: the so-called “Pavley standards” (GHG emissions standards for vehicles), the Low Carbon Fuel standard, a renewable portfolio standard for electricity, and others. California has formally linked our system with Quebec, and we are in the process of preparing to link with Ontario. Other places look at the California system, too—either because they want to start something of their own, or because, as in the EU, they’re thinking of modifying their current system to create further linkages without formal allowance trading. For example, the Chinese system, which is under development at the moment, was built on a number of state-level pilot efforts and was very heavily modeled on the California system.


The state of Washington is developing its own version. It includes a number of similar features to California’s system, but it is not the same. They’re designing something that is particularly suited to their own political and economic needs, and we have worked to share lessons learned with them through our Pacific Coast Collaborative. 

What can we expect six months to a year from now in terms of others besides Quebec joining with California on this model?

Rather than creating one big union of cap and trade, our emphasis has been on educating other jurisdictions, based on our experience, about what it takes to do a program like California’s—and encouraging them to both learn from us and experiment on their own. We are in a time when we know there is no top-down solution to the problem of climate. It’s a period where businesses, cities, and other entities are experimenting. They’re looking to each other to learn, and to partner in some ways, but also to strike out on their own and see what might work better for them.

Over the past two years, you, CARB leadership, and staff engineers have worked diligently to expose Volkswagen’s deceitful “defeat devices” that cheated emissions tests. You worked with the Attorney General’s office and the federal government to negotiate a historic settlement with VW that will bring almost $2 billion dollars to California in mitigation and remediation. Can you speak to the significance of that settlement, and its results?

This was a landmark case for several reasons. First of all, it was by far the biggest enforcement action that we’ve ever been involved in—since it was the worst case of deliberate flouting of emissions control law that anyone had ever seen. The amount of money secured for consumers, and for remediation of the harm done by these years of violations, is appropriate to the scale of the problem. Secondly, we fought successfully for the inclusion of important, far-reaching provisions in the settlement agreement. I am particularly proud of the fact that from the beginning, we insisted that any environmental settlement had to include an opportunity to buy back every single one of the cars that were in violation, because we want to get them off roads and to protect consumers. 

Consumers who bought these cars were deceived into believing that they were green vehicles. There was an advertising campaign to that effect; Volkswagen even won one of the various awards that are given for “green car of the year” at a time when they were knowingly using a defeat device on their emissions control system. People who bought these cars did not get the emissions benefits they believed they would, and that they paid for. So we demanded an opportunity for buyback for every one of the cars. Additionally, before VW can sell these cars again, they will have to get approval from us and from EPA that they’ve met a new set of standards. We expect to have those standards completed within a few months, because we intend to be absolutely sure, before any cars go back on the road, that it has been fixed.

Can you elaborate on how VW’s payments to California will work as a result of the settlement and Consent Degree? 

The Consent Degree created two pots of funds. One is a national fund of $2.7 billion, which will be allocated to states and tribes in proportion to the volume of vehicles that were sold and registered in each. California is entitled to about 14 percent of that total. It isn’t a grant program; it’s a way to ensure that states have concrete plans to reduce NOx emissions from vehicle sources. It also ensures that there’s an audit trail at the end of the day. We are very focused on accountability and ensuring that the funds are spent as intended.

To get the funds, the state will submit a plan showing how we intend to reduce NOx from vehicle sources within California, and then there’s a list of types of projects that are to be approved. It’s likely that these will be mainly projects that expand on things that we already are doing but that we needed more funding for. At the top of my list is the replacement of old, dirty school buses. We’ve been using various sources of money over the last few years to try to get the worst pre-1970 buses off the road, but we still have too many children being driven around in diesel buses with very outdated emissions controls. We’re talking about our up-and-coming generation here, and we want to make sure they’re getting the best air that we can provide. 

California has an $800-million set-aside for VW to invest in projects that facilitate and support the EV market over the next 10 years. VW understands that one of our biggest priorities is ensuring access to EVs in all of California, including disadvantaged communities.


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