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CARB Approves Nation’s Biggest Cap-And-Trade Plan

California regulators voted yesterday to approve the most comprehensive U.S. cap yet on greenhouse gases and create the biggest carbon market in the country, the New York Times reports.

The California Air Resources Board (CARB) voted 9-1 to approve the state’s cap-and-trade plan, the keystone of its effort to reduce emissions to 1990 levels by 2020 under A.B. 32 and the nation’s first economy-wide, market-based greenhouse gas scheme in the absence of federal action. California has the world’s eighth-largest economy and the highest gross state product in the United States, at $1.7 trillion in 2009.

According to CARB, the trading scheme will reduce emissions from power plants, oil and gas refineries, steel manufacturers and a host of other heavy industries that emit more than 25,000 tons of CO2 per year. All emitters will start out receiving enough free permits to cover the majority of their emissions, but will gradually have to buy more, via quarterly auctions that will begin in February 2012. The system will cover 85 percent of the state’s industrial emissions by the time it ends in 2020.

Financial analysts have estimated the 2.7 billion allowances will be worth $15-$60 by 2020; a forward trade conducted last month put the price at $11.50 per ton.

Gov. Arnold Schwarzenegger (R) paid a visit to yesterday’s 10-hour proceedings to point out voters’ support of A.B. 32. Last month they turned down a challenge via ballot initiative: Proposition 23, sponsored by Valero Energy Corp. and Tesoro Corp. It would have postponed the carbon regulations until unemployment fell to 5.5 percent for four consecutive quarters.

“It just shows to you that a huge majority of Californians are big believers in A.B. 32,” he said to reporters. “And they’re big believers not just in global climate change — let’s be honest, not everyone believes in that. It’s also about our health. It is about 19,000 people that die every year because of pollution-related illnesses. Every sixth child in the Central Valley goes to school with an inhaler. We can do much better than that.”

CARB Chairwoman Mary Nichols said more work remained to be done over the next year, including calculating allowance levels for emitters, creating more offsets and determining whether biomass emissions should be covered under the cap. “I think what we’ve got is a very good start that needs a bit more work before it hits the road,” she told the New York Times.

Allowance allocations, revenue recipients remain unclear

The approved regulations refined the state’s approach to handing out allowances to utilities, but final figures remain to be determined. Through a series of meetings with utilities, known as the Joint Utilities Group, regulators decided to calculate the number of allowances based on the expected financial burden to ratepayers. They will take into account both historical emissions and anticipated sales, in order to balance the utilities’ actual emissions burden with the desire to promote energy efficiency and other low-carbon improvements that cost money.

“The allocations will be tailored to where the ratepayer burden lies,” Michael Gibbs, California EPA’s assistant secretary for climate change told the New York Times. Although utilities will receive the allowances for free, they will turn them back over to the state to be auctioned off directly to the electricity generators (in some cases the utilities themselves) to create revenue.

CARB will take the next several months to adjust its estimates and will issue a report in July 2011.

Investor-owned utilities gave the plan tentative praise but warned that even more work is needed to protect customers from high allowance prices. CARB needs to come up with a backstop strategy to lower prices in the event that allowances are more expensive than expected, Kate Beardsley of Pacific Gas & Electric Co. told the New York Times. Utility representatives also objected to giving authority over their profits to the California Public Utilities Commission (PUC).

“We want the ability to work with the PUC on the best way to return allowance value,” Beardsley said.

Also undecided is how any revenue from the non-utility auctions will be distributed. Gov. Schwarzenegger, board members and an economic advisory committee have stressed the importance of giving proceeds back to electricity ratepayers who will be affected by higher rates — even going so far as to produce a report debating the benefits of tax cuts versus a lump sum payment to households. But the agency actually has no power to disburse the money.

“We do not have the authority to determine how the money should be spent, so I guess we’ve gone out on a limb somewhat by allocating the proceeds,” Nichols conceded.

Instead, the state legislature will address the issue at some later date, with no guarantee it can even pass a bill. That’s what turned board member John Telles, a cardiologist from Fresno, against the entire regulation.

“This is a regressive tax on the most economically disadvantaged communities,” he said of the plan’s expected effect on electricity rates. “I don’t think we can pass something that doesn’t in very strong language protect the people. This is a moral issue that’s beyond the issue of greenhouse gas reductions.” He was the board’s sole ‘no’ vote.

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