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Moving Forward: Global Warming Solutions Act, AB 32, Part 5

By Tiffany Rider - Senior Writer

November 6, 2012 - It sounds like a campaign slogan, but AB 32’s cap-and-trade program is moving forward.

But not everyone is welcoming change.

Tom Bowman, local climate expert and owner of Bowman Design Group, said that as
a proponent of AB 32 and a small business owner, he understands the concerns of
those regulated under the cap-and-trade program. “This is a really hard time,”
Bowman said of both the current economic climate and the struggle to reduce
climate change. “That doesn’t mean we should stop . . . moving forward.
There’s that old saying that when the going gets tough, the tough
get going.” (Photograph by the Business Journal’s Thomas McConville)

Change, whether it’s business or personal, involves courage and fear, pain and growth. AB 32, the Global Warming Solutions Act of 2006, was passed by the legislature and signed by then-Gov. Arnold Schwarzenegger with the intent of reducing greenhouse gas emissions impacting climate change down to 1990 levels by 2020. To do that, both the public and private sector must work together to implement and execute the tasks of the legislation.

While AB 32 supporters and impacted businesses agree that this goal is both admirable and right for California, the two sides seem despondent in coming to agreement on how that goal should be reached.

For more than a year, the California Manufacturing and Technology Association (CMTA) has been fighting for free carbon allowances from AB 32’s implementer, the California Air Resources Board (ARB), to reduce the estimated business costs of meeting emissions standards. While impacted companies are allotted 90 percent of the allowances necessary to meet the cap for the first segment of the program (the number of free allowances drops to 75 percent of the cap in 2015 and 50 percent of the cap in 2018), CMTA argues that the cost of purchasing allowances for that final 10 percent of the cap is too much for businesses to bear.

“We’ve been asking ARB to reallocate allowances to the cap,” Gino DiCaro, CMTA spokesperson, told the Business Journal. “Over the next eight-year period, companies are going to have to buy more and more allowances.”

Those allowances are available for purchase through ARB-led auctions – the first scheduled for November 14 – to let a market-based approach effectively price the permit. Economists involved in the development of the cap-and-trade program and allowance auction believe this approach is best in both setting a price for carbon that companies must consider in their budgets and a price that is relative to the purchasing ability of impacted businesses.

While DiCaro said the organization doesn’t have a problem with the cap itself, there is concern that companies will be forced to reduce production and purchase allowances and carbon offsets, in addition to becoming more efficient energy users. These companies include everything from food processors to breweries, petroleum refineries to concrete manufacturers, saw mills to metal processors, and others.

“There is already a significant cost to producing in California,” DiCaro said. “Industrial electricity rates are higher than anywhere else in the country in California. . . . There is already a fee under the cap. . . . This cap-and-trade auction has been a priority [for CMTA] because we always thought it would be developed in a manner that is effective.”

However, the state isn’t going to be able to address climate change without some costs, according to Gary Gero, president of the Climate Action Reserve, which has the goal of promoting greenhouse gas emissions reductions by pioneering credible market-based policies and solutions.

The nonprofit reserve was originally called the California Climate Action Registry, an organization created by state law in 2001 for the purpose of writing emissions standards and inventory for companies. The registry was able to get about 350 entities to report emissions before the new law came into effect and the 2001 law sunseted, Gero told the Business Journal.

The Climate Action Reserve transitioned to greenhouse gas accounting, or measuring emissions using standardized methods. The reserve has established 14 protocols for carbon offsets, four of which have been adopted by ARB for AB 32. Gero said the reserve has another half dozen protocols in the works, has 500 offset projects in its system and issued nearly 30 million offsets.

The reserve applied to be an accredited registry for the cap-and-trade program. “Our understanding is that a public announcement of accredited registries will be forthcoming shortly,” Gero said. “We expect to be accredited and another one, too.”

As an accredited registry, the reserve would not be paid by the state. Rather, the reserve would charge a small fee for each credit registered to cover about 60 percent of its budget. The other 40 percent would come from fundraising and foundation grants, much like a traditional nonprofit.

“I have no doubt that the overall program will be successful in achieving the reductions under AB 32,” Gero said. He prefers the cap-and-trade method, which provides certainty with the limited number of allowances but an unknown cost for those allowances that is left up to the market, over a carbon tax, which is a set price with less of a guarantee of behavior change.

Gero is an advocate of carbon offsets because they make the overall cost of compliance cheaper. They also help other sectors not impacted by AB 32 or involved in the program become a part of the regulated emission reduction movement in California.

“You have to acknowledge that this program is going to have costs,” Gero said. “As originally written, AB 32 did not include a market-based mechanism. In the development, the business community convinced Governor Schwarzenegger that AB 32 needed to have a market-based approach. The governor signed the bill, and that was the right decision in terms of how to achieve our environmental objectives.”

Tom Bowman is the owner of local small business Bowman Design Group and is a self-described expert on climate change and green business strategy. He told the Business Journal that, in looking back over the six years since AB 32 passed, there have been endless meetings with stakeholders to come up with the way the cap-and-trade program functions today.

“You can’t make that argument,” that the economic climate is too difficult for businesses to be required to purchase allowances now, Bowman said in response to the claims of the CMTA and other allowance auction dissenters. “It is the kind of argument they think will appeal today in the economic climate.”

But business has been difficult for some regulated under AB 32, said Jay Grady, senior environmental manager for CalPortland’s plants in Colton and Mojave. The plant in Colton has been under a temporary shut down since 2010 due to the lack of construction work in the state.

“This has been the case with the entire cement industry,” Grady told the Business Journal. “We’ve lost 50 to 60 percent production capacity and sales since 2006, so we’ve taken production from here to the Mojave plant so we could maintain full capacity there.” The Colton plant saw 137 layoffs in 2010 and currently serves as a transfer station for deliveries from the Mojave plant, he said.

HCVT - Certified Public Accountants

While Grady said the company has been doing all it can to reduce emissions, CalPortland will have to participate in the auction as it is emitting well above the 25,000 metric ton threshold. “We have to pay $200,000 in fees before that,” he said. “[The allowances] is like the government printing money to generate a tax, and we’re a structured buyer.”

While the U.S. Environmental Protection Agency’s Energy Star program has recognized CalPortland for its energy reduction efforts eight years in a row, giving the company the 2012 Energy Star Award for Sustained Excellence, those energy savings are not applicable under the cap-and-trade law, Grady said.

Cement production inherently releases carbon dioxide, and technology is only just emerging to change this process, according to Bowman. A Monterey-based company called Calera Corporation has developed a method of manufacturing cement from carbon dioxide, called carbon-sequestered cement.

“Having been in business for 25 years, what I’ve learned more than anything else is that there is always some challenge we have to adapt to,” Bowman said. “There’s one challenge after another. This is a really hard time. That doesn’t mean we should stop moving forward. There’s that old saying that when the going gets tough, the tough get going.”

DiCaro points back to the original bill, which did not include an allowance auction and not only puts a price on carbon but also raises funds for the ARB. “Now they’re going to raise billions of dollars for ARB and other purposes in California,” he said. “Our point, ever since the bill passed, is we can reach this cap cost effectively and do what the bill says. We’ve been saying that for five years now.”

According to CMTA, the auction will cost 14 refineries $2.96 billion if all impacted refineries choose to only purchase allowances at an estimated price of $25 per metric ton. The minimum price for carbon allowances is $10, DiCaro said.

Last year, as part of the budget deal in the state, there was a trailer bill that set up a process for how those funds should be spent. The bill, authored by Sen. Kevin DeLeon, lays out some categories for spending, like green transportation, forestry and energy efficiency. It designates a portion of those funds for disadvantaged communities impacted by AB 32. ARB also has a spending plan, which is reviewed by an advisory committee that sends it to the legislature for review and comment. The plan is then adjusted accordingly and submitted for consideration in the governor’s budget.

Moreover, California law mandates any fees collected by the state for a certain activity must be used to reduce that activity; therefore, fees collected through AB 32 must be spent on activities that align with the goals of the legislation.

“The idea of the program is to ultimately drive change,” according to Gero. “What we are looking for as a state, and as the stated goals of the state and the governor’s office and the ARB, is to have a cleaner technology economy and to get an edge on the rest of the country. That is starting to be successful in that 70 percent of venture capital is spent here. California is being very proactive in choosing the future of its economy and in doing that it has created policy tools like the cap-and-trade program to get to that future. There are people in the old economy who will have to go through a transition or transformation.”

AB 32 Allowance Auction At A Glance

Under the cap-and-trade program of AB 32, ARB will hold carbon allowance auctions and reserve sales for those regulated by the cap. The first of these quarterly auctions is scheduled for November 14, and the first quarterly reserve sale is scheduled for March 8, 2013.

The November 14 auction will be conducted online from 10 a.m. to 1 p.m. Pacific Standard Time through a secure platform that is integrated with other cap-and-trade online platforms. The platform is available at https://www.wci-auction.org. The minimum number of allowances available for the current auction (2013 vintage) is 21,804,539, with another 39,450,000 for advance sale (2015 vintage).

Bids are to be submitted in a single-round, sealed-bid auction format, and only in multiples of 1,000 allowances. One allowance is equal to one metric ton of emissions. “Beginning with the highest bid and proceeding to successively lower bids, entities submitting bids at each price will be awarded allowances,” according to an ARB press release. “The settlement price for all allowances will be the lowest price at which the entire supply of allowances is exhausted or the reserve price, whichever is reached first.”

Regulated entities must apply for the auction and submit a bid for reserve sales, and must meet financial requirements to participate. ARB has contracted with Markit North America, Inc. to act as the auction and reserve administrator and Deutsche Bank National Trust Company as the financial services administrator.

Any questions or comments about the allowance auctions and reserve sales should be directed to Chuck Seidler at 916/324-0931 or via e-mail at cseidler@arb.ca.gov.