California Cap-and-Trade Rules: Still Flawed

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California Progress Report

By Orson Aguilar and C.C. Song

There has been a lot of cheering over the Dec. 16 decision by the California Air Resources Board to adopt rules setting up the nation’s first cap-and-trade system for reducing carbon emissions.

While the regulations represent an important first step and contain several positive elements, their flaws are serious and shouldn’t be ignored.

As the regulations now stand, their ultimate result could be a massive giveaway to the state’s biggest polluters. Instead of reducing greenhouse gas emissions, the proposed rules could result in billions of dollars in windfall profits to polluting industries at the expense of California’s most vulnerable communities.

A successful cap-and-trade program relies on a strategic allocation of allowances. In that context, it is hard to grasp the strategic value of CARB’s decision to give away the overwhelming majority of carbon allowances for free to big polluters.

By giving away 90 percent of the allowances for free in the first year with no guarantee of any decline in the amount of freebies over the following years, the rules provide only very weak incentives for polluters to reduce emissions.  Worse, polluters can gain windfall profits by passing the cost of emissions reduction onto consumers, even though they are receiving the allowances for free.

CARB attempts to rationalize the free allowances as a way to prevent certain businesses from leaving the state, but many studies raise strong objections to large portions of free allowances. Among these is the set of recommendations published by the Economic Allocation Advisory Committee (EAAC), an advisory board of economists and policy experts appointed by CARB Chair Mary Nichols and California’s Secretary of Environmental Protection.

EAAC specifically recommended that the cap-and-trade program  “rely principally, and perhaps exclusively, on auctioning as the method for distributing allowances.” Free allowances, if used at all, should be reserved for specific purposes and involve “a very small share of allowance value,” EAAC recommended.

The massive giveaway of allowances waters down the most crucial part of the cap-and-trade program, raising the likelihood that lower-income communities will continue to live in the most polluted areas and will not gain the green jobs that we have long been waiting for.  Ultimately, the rules will likely result in low-income households and small businesses subsidizing this giveaway through energy bills.

CARB’s rules only partly address another critical issue, the establishment of a Community Benefits Fund, to be funded from a portion of the auction proceeds. These funds should be directed to the most disadvantaged communities, which generally suffer the worst pollution, are most vulnerable to the effects of climate change, and are in desperate need of jobs. CBF funding should go to reducing air pollution and climate change, improving community public health, and promoting clean-energy jobs — including energy efficiency investments, smart growth land use planning, and workforce development.

CARB’s rules recognize the need for such a fund and urge the Legislature to establish and fund it, but the board could have set aside a portion of the allowances for this purpose. Since it didn’t, the new Legislature and Gov. Brown should make this a priority when they take office in January. Unfortunately, by choosing to give away 90 percent of carbon allowances, CARB has left it unclear whether there will be enough money to make these community benefits a meaningful reality.

In order for California to truly lead the nation in moving toward a healthy, clean-energy economy, our climate change policies must not merely be symbolic, but also substantial. CARB’s first attempt at cap-and-trade rules takes us some small steps in that direction, but not nearly far enough.


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