California's Cap-and-Trade Illegality: CARB Rethink Necessary

By Tom Tanton -- May 31, 2011

Background:Earlier this year, I wrote about a new, tentative California Superior Court decision that threw a monkey wrench into California Air Resources Board’s climate regulatory scheme.

 a California superior court once again ruled against the California Air Resources Board (CARB) for failing to comply with environmental law pursuant to AB 32, California’s global warming law. The tentative decision directs CARB to rewrite its California Environmental Quality Act (CEQA) documentation, and to cease implementation of the AB 32 Scoping Plan until the violation is corrected.

The decision is based on violations of process only and does not address any scientific or economic substance of either the CEQA documentation or of the scoping plan. Reactions have been mixed from “no big deal” to “hallelujah.”

The judge’s decision states that CARB violated state environmental law with its 2008 plan to reduce greenhouse gases and its more recent cap-and-trade regulatory schema.

If the judge’s decision is made final without substantive change, the state would be ordered to stop the implementation of AB 32 until the CEQA process is fully complied with.

Update: Court Ruling Final

In March, the tentative decision was made final, except for orders and relief. Judge Ernest Goldsmith ruled that CARB had failed to conduct such an [alternatives] review but left open the question of whether the agency could conduct rulemaking, environmental studies or do any other work while the legal issues were being resolved. The state said at the time that it would appeal.

Well, the decision is now final and complete. California [CARB] must immediately halt work on its cap-and-trade program until it completes a review of alternative approaches to reducing climate change, the court ruled on May 20.

Cap-and-Trade was set to begin operating in January 2012, but the Court’s order could cause delays. Many participants hold the view that ARB dodged a potentially fatal bullet in its implementation of cap and trade. The Court could have ruled that a trading scheme was an unacceptable method of reducing emissions. The Court could also have stayed the entire suite of regulations that the state is pursuing, 69 in all, including a low-carbon fuel standard, local development and smart growth guidelines, and emissions reductions from ships and trucks.

Whistling Past The Graveyard?

CARB cap-and-trade market participants seem intent on whistling past the graveyard. Other areas of the state’s greenhouse gas-reduction law, such as the state’s low-carbon fuel standard for automobiles and the requirement that utilities in California obtain a third of their energy from renewable sources by 2020, are not affected by the ruling, even though they suffer the exact same analytic and process deficiencies. So again, CARB and supporters breathe a sigh of relief, rather than take a lesson: “do your homework.”

As opined in E&E News (subscription required)

California regulators still might be able to start their greenhouse gas trading program in January 2012, despite a court decision last week to stay the first trading system in the United States for greenhouse gas emissions from power plants, oil and gas refineries, transportation fuels and other heavy industries…

The question now is whether ARB can get back on track by Oct. 28, the date that it has to finalize the program according to internal regulations. If it misses the deadline, agency employees will have to begin the process over again, starting with submitting the original cap-and-trade regulation back to the board for approval.

[Plaintiff] Newell predicted a delay. “I seriously doubt ARB will be ready unless they try and cut corners, but we are standing by to prevent bad-faith conduct by ARB,” he said. “A direct challenge to the cap-and-trade regulation itself may come at some point in the future, if ARB elects to retain cap-and-trade as the key component of the scoping plan.”

The decision might also delay rulemakings going on at other agencies, including a proceeding in the California Public Utilities Commission on how to spend proceeds from the auction of allowances…

Carbon traders, like Josh Margolis, CEO of CantorCO2e, were unconcerned. “He didn’t say CARB’s answer was wrong,” he said of Goldsmith’s ruling. “Like a math teacher, he sent the [functionally equivalent document] back with a note to Mary [Nichols], ‘Show your work.'”

“The sun will come up tomorrow. There will be a cap-and-trade program. We will be trading in 2012.”

What Analysis is Needed?

The California Environmental Quality Act (CEQA) lays out specific requirements for evaluating alternative in agency decisions. California Code of Regulations, Title 14: Chapter 3: Article 9. Section 15126.6 Consideration and Discussion of Alternatives to the Proposed Project, subsection (e) describes the requirement to include in EIRs (and by extension their functional equivalent):

“No project” alternative. (1) The specific alternative of “no project” shall also be evaluated along with its impact. The purpose of describing and analyzing a no project alternative is to allow decision makers to compare the impacts of approving the proposed project with the impacts of not approving the proposed project.

In this instance, “project” is a regulation or set of regulations being adopted, so a “no-project” alternative would be not implementing the regulations being considered. In other words, what if CARB were less myopically focused on adopting something (anything), and simply monitored emissions? They would find that emission reductions and intensity have been occurring, were occurring, and would likely continue to occur, without their heavy handed and intrusive regulation. They’d also find out that global emissions are made worse by the regulations.

One major “justification” of CARB’s Scoping Plan were the claimed economic benefits from the various measures, such as energy efficiency mandates. Putting aside for the moment the validity of the original analysis, the impact of recent developments in natural gas technology (e.g. hydro fracturing in the Marcellus Shale) on dramatic reductions in forecasted natural gas prices by EIA call into question whether CARB’s economic analysis of their energy efficiency measures is still valid (if it ever was.)

The same is true for the faux-analysis of Cap and Trade. Since the CARB’s analysis was done, significant new natural gas resources have been identified and are being developed, increasing domestic resources by up to 40 percent, and driving down forecasted natural gas prices.

Lower future natural gas prices are reflected in the U.S. Energy Information Administration’s 2011 Annual Energy Outlook. CARB has never answered the fundamental question of why their economic analysis is so out of line with everybody else’s on the question of cap and trade impacts, nor even the impact of dramatic lower future energy prices, nor changes on fuel mix driven by simple economics.

In my February post on the same subject, I noted:

Equally, if not more important to the procedural requirements laid out in CEQA, AB32 and the Judges Decision, is that alternative techniques for capturing those efficiency improvement were not fully considered. IF consumers can actually save untold millions (well CARB actually said how many millions they thought would be saved) by implementing efficiency measures, why did the CARB decide on regulations and mandates rather than proposing to print a consumer catalog? CARB could easily rely on free market and rational behavior on the part of consumers to save themselves cash, and also saving the State the cost of enforcement.

“No-Project” Alternative is Functionally Just as Good, If Not Better, Than The Regulatory Project

From 2000 to 2008, the carbon dioxide intensity of the U.S. economy—measured as metric tons carbon dioxide equivalent (MTCO₂e) emitted per million dollars of gross domestic product (GDP) — improved by over 15 percent or 1.7 percent per year, as shown in Figure 1. For the latest pair of years, carbon dioxide intensity improved by roughly 2.7%, and actual GHG emissions fell by 2.8% over the same period.

Total U.S. anthropogenic (human-caused) greenhouse gas emissions in 2009 were 5.8 percent below the 2008 total. The decrease in U.S. CO2 emissions in 2009 resulted primarily from three factors: an economy in recession, a particularly hard-hit energy-intensive industries sector, and a large drop in the price of natural gas that caused fuel switching away from coal to natural gas in the electric power sector, which lowered our emissions intensity.

Figure 1

Between 2000 and 2008, the United States’ emissions intensity has improved by 15%, a little less than 2% per year, and there has never been a year of degraded (i.e. higher) intensity. And California is better on average than the rest of the country. In a late 2007 Report by the Congressional Research Service, the various states were compared on both total GHG emissions and by GHG emissions intensity. Naturally, as the eighth or ninth largest global economy (albeit falling from 5^th or 6^th in 1990) the TOTAL emissions for California ranked second highest (worst) nationally but second LOWEST (best) in intensity.

Leakage: CARB’s Achilles Heel

California’s emissions intensity may be a beacon to other states and countries, but implementing Cap and Trade, and more generally AB32, will increase global emissions, by forcing businesses, manufacturing, and even agriculture out of state, where emissions intensities are much worse, leading to emissions “leakage.” California will simply be put in a position of importing goods we used to make and grow, with a net increase in global emissions.

It’s time for CARB to go back to school. The Court’s decision is one step in that direction.

 

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U.S. Energy Information Administration, Emissions of Greenhouse Gases in the United States 2008, Dec 2009.

U.S. Energy Information Administration, ibid.

U.S. Energy Information Administration, Emissions of Greenhouse Gases in the United States 2009, March 2011.