California regulators look at reducing 'cap and trade' burden on businesses

Sacramento BeeAugust 14, 2012 

Big business sees California's global-warming law as a job killer, a $1 billion tax that could force some of the state's heaviest industries to flee.

Now state regulators, trying to ease the burden, are studying whether to give hardship breaks to dozens of companies.

Under the plan being considered, the state would dole out extra carbon credits – the precious allowances that will give industries the license to emit greenhouse gases starting in January. The proposal could save companies millions of dollars.

Like practically everything connected with Assembly Bill 32, the Global Warming Solutions Act, the idea is controversial.

Some environmentalists say extra allowances would weaken a system they fear is already ripe for manipulation.

"We're … concerned about the system being gamed," said Kathryn Phillips, director of Sierra Club California.

Businesses, however, say they need all the help they can get as they struggle with the complexities and costs of AB 32.

Handing out additional free credits "would provide much-needed relief. It won't solve the whole problem," said Ed Yates of the California League of Food Processors, a group whose members include Campbell Soup and Del Monte. Carbon credits are at the very heart of AB 32. This fall the state will allocate millions of them, each representing a ton of greenhouse gases, to approximately 430 factories, refineries and other industrial users.

In total, the credits will constitute a ceiling on California's annual carbon emissions.

The allotment will be reduced 2 percent to 3 percent a year in order to gradually bring down the amount of carbon in the air.

The 430 affected companies will get most of their allowances from the state for free – 90 percent in each of the first two years.

The percentage of freebies is scheduled to decline in future years.

The rest of the credits will cost money. Companies will be able to buy them directly from the state, which will hold regular auctions starting in November.

Or they can buy them from other companies on the state's "cap and trade" market.

The market is patterned after carbon markets that have been run for years by the European Union and a coalition of northeastern states.

It's making California businesses nervous. Even with loads of free credits, companies say the costs of purchasing the rest could be prohibitive. It won't help that the allotment will decline each year, they say, likely raising prices.

"It's going to be a huge economic burden, of course," said Brenda Coleman, policy advocate at the California Chamber of Commerce. "All industries are susceptible."

In the market's first full year, California industries are expected to pay $1 billion or more for allowances. The cost could grow to $6 billion a year in 2015. That's when the market will expand to include oil refiners paying for the greenhouse gases emitted by cars and trucks on California roads.

Mindful of the so-called "leakage" effect – the prospect of companies leaving California to escape the costs – the California Air Resources Board is looking to tweak the system.

One likely solution is to give more free carbon credits to companies deemed at risk. The total amount of credits available each year wouldn't increase – it would still fall 2 percent to 3 percent a year – but a greater percentage of them would be handed out for free. This would save some companies millions of dollars a year, although the extra freebies wouldn't kick in until 2015.

The ARB says it believes the extra carbon allowances would strike a balance between businesses' needs and the environment.

"Obviously we don't want industry to leave the state, but we want them to meet the emissions requirements," said air board spokesman David Clegern.

The ARB's proposal is the latest twist for AB 32, which survived a challenge at the ballot box in 2010 but is still struggling for acceptance. California was hoping to operate the cap and trade market via a multistate Western alliance, but that fizzled. Only the Canadian province of Quebec has committed to linking its carbon market with California.

While the market's opening bell won't ring for a few months, carbon traders are already jockeying for position. Industrial users and speculators are buying and selling the credits – known as California Carbon Allowances – on two futures exchanges. The going rate: around $19 a ton.

Buyers are trying to lock up credits now on the assumption that prices will go up later, said Jon Costantino, a Sacramento lobbyist who runs the Association of Carbon Market Participants.

Trading is light – maybe $2 million a day – but should ramp up in the coming months.

"This is still very early days," said Lenny Hochschild, a carbon trader in San Francisco with brokerage firm Evolution Markets.

The idea behind "cap and trade" is to inject market forces into the war on global warming.

Companies that scrub their smokestacks clean will have credits to spare – and could make a killing selling them to firms that have exceeded their limit.

More free credits don't sit well with some environmentalists. They say extra freebies would undermine the law.

"What motivation is there for a company to reduce their emissions … if they're given their credits?" said the Sierra Club's Phillips.

The ARB disagrees. Businesses will have to curb their emissions to stay under the ever-declining ceiling.

"The whole concept of the cap and trade is the cap," said ARB spokesman Stanley Young.

Companies say they don't expect to pocket huge windfalls from selling unused credits.

Just the opposite – they fear that they'll have to spend heavily on emissions credits to stay under the cap.

"Nobody really knows how much credits are going to cost," said Christine Haddon, a spokeswoman for the California Chamber.

The potential cost is worrisome for those battling out-of-state and overseas competitors that won't have to pay for the right to emit carbon.

"If you're competing with a tomato processor in Indiana, they don't have to deal with it," said Yates, president emeritus of the food processors' group. "If you're processing dried onions and garlic, China doesn't have to deal with it."

Johns Manville is among the companies pleading its case for more free credits.

Manville makes insulation at a 200-employee plant in Willows – a plant that's running at just 50 percent capacity because of the weak housing market.

Complying with AB 32 will weaken the plant's financial situation, but additional free carbon credits would soften the blow.

"It would make it easier for us to keep operating," said Bruce Ray, Manville's director of governmental and regulatory affairs.

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