Air Conditioning

Emissions standards target key industries

Back Longreads Oct 1, 2010 By Rich Ehisen

If there is one thing a business owner hates, it is uncertainty. Planning for the future — or even managing the present — cannot effectively happen unless the person signing the checks knows the rules of the game. But when it comes to California’s efforts to reduce greenhouse gas emissions, uncertainty is about the only thing employers can count on right now.

That shaky situation will be addressed to some degree in November when voters weigh in on Proposition 23, the ballot measure to determine whether the state will continue implementing Assembly Bill 32, the law requiring California to cut its greenhouse gas output to 1990 levels by 2020. The campaigns for and against the measure are kicking into high gear with each expected to spend tens of millions of dollars wooing voters. The measure’s supporters face a stiff battle: July polling from the Public Policy Institute of California shows 67 percent of California residents support the state moving ahead with AB 32.

But even if that figure holds true at the ballot box, it only solves the most visible challenge in the state’s ongoing reduction efforts. Solving the rest of the Rubik’s Cube will still require much of the plans to progress in favor of California Air Resources Board planners and its supporters.

As history has shown us, getting laws in place is no guarantee things will work out the way politicians hope and expect. Then-Gov. Earl Warren signed the first major air pollution legislation in state history in 1947, a measure that created air pollution control districts in every county. A steady stream of state and federal laws and regulations have followed, but even so, a near-evangelical devotion to cars and suburban sprawl has kept California bogged down in some of the nation’s worst air quality. Today, 43 years after President Lyndon Johnson signed the federal Air Quality Act of 1967, California remains the only state able to establish its own auto tailpipe emissions standards, which the California Air Resources Board says is because of its “unique need for more stringent controls.”

That measure and most like it have dealt primarily with air quality and the impact it has on public health. By the 1970s, however, the global air quality discussion had broadened to include the first mentions of how chemicals discharged into the atmosphere were spurring global climate change. The debate over the phenomenon has raged ever since, centered mostly on mankind’s role in the matter.

“Remember, there wasn’t a great consensus on going to the moon either.”

Warren Smith, CEO, Clean World Partners

“I just can’t bring myself to buy the conclusion that global warming is being caused by man,” says Assemblyman Roger Niello, a Fair Oaks Republican who supports Proposition 23. “The earth has warmed and cooled over the ages, continually and forever, so now all of the sudden this time we’re causing it? I just have a hard time with that conclusion.”

While there are certainly those who share Niello’s skepticism — including Marysville Assemblyman Dan Logue, the driving force behind Proposition 23 — the vast majority of the world’s scientific community does not. Neither does Gov. Arnold Schwarzenegger, who has championed California’s efforts to become the global leader in fighting climate change. “We simply must do everything in our power to slow down global warming before it’s too late,” he says. 

Debate over the source aside, it’s not hard to fathom the effects climate change could have on California. A June report by the Public Policy Institute of California lists its negative consequences, from a drastic rise in sea level to a marked increase in extreme weather such as flooding, droughts and wildfires. If that dark vision were to become reality, it would have a devastating across-the-board impact on every aspect of the state’s economy and quality of life.

Even so, the state’s effort to reduce greenhouse gas emissions has been met with mixed responses from the state’s largest industries. Much of that skepticism centers on AB 32’s proposed cap-and-trade plan, which would set emissions limits on the state’s biggest polluters while also giving them an escape hatch if they can’t meet those limits. Resistance to the plan has been venomous with critics dubbing it the “cap-and-tax” plan, saying it will lead to higher business operating costs passed on to consumers.

It has not helped that the plan has at times been a torturous exercise in construction. When AB 32 passed in 2006 nobody knew what California’s greenhouse gas emissions levels were in 1990. CARB officials first had to analyze a mountain of old data just to figure out what goal they were trying to reach. After a year of studying everything from agricultural practices to industrial processes as they were in 1990, the agency set the figure at 427 million metric tons of carbon dioxide. It also determined that without significant intervention, that total would climb to almost 600 million metric tons annually by 2020. That meant CARB would somehow have to figure out how to cut 173 million tons of greenhouse gas production each year — an approximate 30 percent reduction from “business-as-usual” emissions levels projected for 2020 — to satisfy AB 32’s legal requirement.

The agency also determined that “early action items” enacted since 1990, including stronger tailpipe emissions standards and less carbon-intensive automotive fuels, had already shaved 66 million tons annually from the equation. That was the good news; the bad news was that the other 107 million tons each year would have to come from changing how the state and pretty much everyone in it goes about their daily business.

The bulk of the plan is simple: The largest polluters will be allowed to produce a certain amount of greenhouse gas emissions each year. If they go over, they can buy or trade credits from entities that don’t use their allotments. The totals will drop annually, forcing everyone to either lower the emissions or pay for going over their cap — the so-called tax the plan’s critics fiercely lament.

There is another controversial wrinkle to this as well. The cap-and-trade program will also allow polluters to purchase offsets from companies and groups who are working to cut emissions but are not subject to the caps. This is where things get a bit dicey. Offset projects could be located anywhere in the world, from rain forest preservation in Brazil to energy efficiency projects in the Central Valley. Although CARB plans to require all offsets to be verified by an independent third party, that breadth is a major concern to some staunch environmental advocates who worry some offsets will allow polluters a cheap way around the law.

“We understand the concerns over using offsets from around the globe. Any offset has to be real and quantifiable.”

Timothy Tutt, government affairs representative, Sacramento Municipal Utility District

Critics also argue that unscrupulous manufacturers will game the system even further. For example, a report released in July by the Brussels-based nonprofit Clean Development Mechanism Watch, which tracks the European cap-and-trade program that has been in place since 2005, accused some refrigerant plants of producing exorbitant amounts of the refrigerant HCFC-22 in order to sell more credits for destroying HFC-23, the waste gas produced in the process. HFC-23 has about 12,000 times more heat-trapping capacity than carbon, making it a popular target for offset purchasers. Destroying it is also an incredibly lucrative business. Credits for getting rid of HFC-23 are worth up to 70 times the actual cost of destroying the gas, and are up to five times more valuable than the original HCFC-22 itself.

In short, the more HCFC-22 the factories make, the more waste gas they can destroy, thus creating more lucrative offset credits they can sell on the multibillion dollar global cap-and-trade market. As CDM reports, although HFC-23 destruction accounts for only about 2.5 percent of the EU’s total authorized offset projects, they account for more than half of the credits issued. At the current rate, CDM says the EU will issue more than 476 million HFC-23 credits by 2012, worth an eye-popping $7.7 billion.

Timothy Tutt, a government affairs representative with the Sacramento Municipal Utility District, says the utility supports the use of offsets in spite of such risks.

“We understand the concerns over using offsets from around the globe. Any offset has to be real and quantifiable,” he says. “We have to remember that climate change is a global problem.”

CARB spokesperson Stanley Young says California’s cap-and-trade plan will limit the amount of offsets that can be purchased to approximately 4 percent of the total cap allowance.

The use of offsets is only one of the many questions CARB officials must answer regarding the cap-and-trade proposal, including what they will do with any revenues the program generates. In August 2009, CARB chairman Mary Nichols told Comstock’s there are a number of possibilities, including direct dividends paid out to individuals (similar to Alaska’s oil dividend) or to “programs we know benefit small businesses.” Lawmakers have their own ideas as well, as evidenced by the Legislature recently approving AB 1405, a bill requiring 10 percent of any cap-and-trade proceeds to be used to fund greenhouse gas reduction and health mitigation programs in the state’s “most impacted and disadvantaged communities.” As of press time, Schwarzenegger had not signed or vetoed the measure.

If recent experience with the Regional Greenhouse Gas Initiative (the nation’s only other cap-and-trade program) is any indicator, CARB officials may also find themselves fending off lawmakers during future budget battles. Last June, the RGGI, which is comprised of 10 northeastern states and currently caps only electric utilities, raised a cool $80.5 million at its quarterly auction of carbon credits. Under a memorandum of understanding between the member states, those proceeds are supposed to funnel to various energy efficiency programs that, according to the RGGI, “benefit consumers and build a clean energy economy.”

But with state economies still struggling, New Hampshire lawmakers voted to take all of this year’s proceeds, around $3 million, to help plug an almost $300 million budget gap. In recent years, New Jersey and New York have also raided their accumulated RGGI funds to the tune of $65 million and $90 million, respectively. Others have considered following suit, though to date none have done so. Those raids have prompted calls across the RGGI states for laws barring the transfer of cap-and-trade proceeds to states’ general funds.

July polling from the Public Policy Institute of California shows 67 percent of California residents support the state moving ahead with AB 32.

For now, much of the debate over California’s cap-and-trade plan is speculative because final rules for its implementation aren’t set. Although CARB was supposed to finalize those regulations by November, that is now almost certain not to happen before December, which would prevent them from being used in the Proposition 23 ballot campaign. There is also no indicator of when — or if — all of California’s partners in the Western Climate Initiative will be on board with their own cap-and-trade programs.

Dorothy Rothrock, vice president of government relations for the California Manufacturers and Technology Association, which supports Proposition 23, says her organization is “reconciled” to AB 32 and its related efforts moving forward. But she says CARB can expect those most impacted financially to stay square in the thick of how that happens.

“There is no certainty in AB 32 except for the target itself,” she says. “There is no certainty in cap-and-trade. If this goes ahead, then we want the bill to be implemented in a way that is good for the economy.”

Warren Smith, a longtime Sacramento entrepreneur and CEO of Sacramento-based Clean World Partners, which is developing systems to convert organic waste into clean energy, says he understands the concerns of fellow business leaders who feel financially squeezed by the greenhouse gas reduction fight. Smith, a strong AB 32 supporter, says the state should, among other things, consider incentivizing cash-strapped companies to help them get into the fold.

“We must work with companies that don’t have the money, for instance, to upgrade their equipment,” he says.

For all the questions surrounding cap-and-trade and the rest of the state’s reduction plans, Smith contends there is one concrete fact: California has reached a crossroads in dealing with the issue of climate change, a tipping point where it must definitively decide how to move forward, if at all. The path that government leaders, the private sector and voters ultimately choose, he says, will undoubtedly determine the future.

“Remember,” he says, “there wasn’t a great consensus on going to the moon either.”

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