Senate Select Hearing on Cap-and-Trade

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The March 27 hearing by Senate Select Committee on the Environment, the Economy, and Climate Change was originally proposed to be a good hard look at the nature of the funds being collected from industry by way of the cap-and-trade. As the sale of the allocations is expected to bring in up to $3 billion in the first year alone, preliminary legal questions aside (such as the California Air Resources Board's (CARB) authority to collect such sums), the current issue crying out for examination is the application of Sinclair Paint vs. The Board of Equalization (Sinclair). This was to be the hearing to address this issue.

The hearing led off with Air Resources Board Chair Mary Nichols reporting to a decidedly friendly audience at the dais.

Following her opening statement that the cap-and-trade is "on track," she noted CARB will only start the auction if the market is ready. She cited the areas which remain unfinished and upon which work continues:

1) The system for distribution of allowances
2) The market itself (which apparently is still incomplete and not ready for prime time)
3) Market oversight provisions

Referring to the potential for market manipulation, Chair Nichols listed a few of the proposed safeguards that CARB plans to implement - the main ones being hiring a market monitor and the employment of experts who will design and provide tools to CARB staff to combat the expected manipulation and respond quickly in such an event.

Chair Nichols announced the August 2012 auction is cancelled. Like similar hearings, there was no prior public notice of the decision to delay or change the program. The vacated August auction date will now be used as a practice auction so stakeholders and market participants can learn how the auction will operate. No one from the dais questioned the timing of this announcement nor were any concerns raised as to what these unannounced delays might have on the business plans and budgets of the industries trying to prepare for the financial requirements of the coming auction - whenever that may be.

On the subject of market partners, Nichols announced Quebec is still not officially in the cap-and-trade market; this leaves California as the sole participant. However, Nichols assured committee members that CARB was continuing to work with Quebec to resolve the remaining issues. CARB expects that there will be a proposal before the Board by June on linking the California cap-and-trade with Quebec's.

When questioned as to why no other states are clamoring to join California’s cap-and-trade market, local political considerations was offered as the reason. The election of new Governors in the other western states, who are playing partisan to climate change politics, has California going it alone.

In the hearing, the only bright spot was Senator Tom Harman (R-35). Senator Harman was able to ask a few tough questions regarding Sinclair impacts, the WCI, and the anticipated projected costs of the program. Unfortunately, due to legal advice, Nichols and CARB were unable to comment on Sinclair. Regarding projected costs of the program, the response was that it depends on the cost of the allowances. Projected costs of allowances run anywhere between $10 (the floor price set by CARB) up to $45 or $50 (the price at which the reserve market allowances will be made available). However, there is no ceiling on the price of allowances in the regulation. Referring to 2015, when the transportation fuels are folded into the program, it was indicated costs could be $4 to $5 billion annually. There were no studies referenced to support these sums. (Independent studies suggest the costs could be substantially more.)

Cara Horowitz, a law professor at UCLA, who previously worked as a staff attorney at the Natural Resource Defense Council, commented on the applicability of Sinclair and presented three areas in which auction revenues may be available for spending in pursuit of California’s current budgetary goals:

1) Direct reduction of GHGs - as set forth in AB 32 itself
2) The advancement of other goals set by the Legislature
3) The reduction of Climate Change impacts (mitigation and adaptation efforts)

Finally, Paul Hibbard, the vice president of the Analysis Group, reported on an economic study he recently completed detailing the beneficial economic impacts of the first three years of the Regional Greenhouse Gas Initiative (RGGI) cap-and-trade program. The take away from this testimony assumes that California will reap those same "benefits" should the Legislature be given the auction funds revenues for budgeting.

Article contributed by John Larrea, Director, Government Affairs

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