A California Cap-and-Trade FAQ
Updated: Nov 9, 2018
California has gone head to head with Washington on a number of issues since #45 landed in office, and you can now add the environment to the list. Scott Pruitt, head of Trump’s EPA, has been in the news recently for proposing a restructuring of the way California sets vehicle emissions standards. Under the Obama administration, the state was granted a waiver allowing them to implement more stringent fuel emission standards than the federal threshold. In addition, other states could choose to “opt into” California’s standards if they’d like. Recently, EPA head Scott Pruitt has announced plans to loosen fuel economy standards for vehicles, and California, New York and 15 other states have already filed lawsuits.
Many observers will see this as an organic result of the ideological differences between California’s EPA and the federal agency in Washington under Trump. To get a better understanding of California’s role in the nation’s environmental footprint, though, here's a look at the fundamentals of cap-and-trade, one of California’s most notorious environmental initiatives, as well as its impact on the Golden State as a whole.
What is California’s contribution of greenhouse gas emissions on the national level?
The most recent comprehensive data from the World Resources Institute dates back to 2014, when California ranked 2nd place for the most greenhouse gas emissions (GHG) by state, comprising 6.6% of the nation’s total emissions. (In fact, California and Texas have kept the same rankings since 2004). While not a statistic to be proud of, as the state with the largest economy and by far the most people, it doesn’t come as any surprise. Californians could at least take pride in not making the top 10 in terms of per capita emissions (Wyoming, North Dakota and West Virginia grabbed the top spots). Coming in 3rd and 4th place for overall state emissions were Pennsylvania and Illinois respectively, who comprise 4.3% and 4.2% of national emissions, but with each less than a 3rd of California’s population.
However, despite the lower ranking on per capita emissions, 8 of California’s cities and metro regions consistently rank in the American Lung Association’s top 10 most heavily polluted areas. Much of this can be attributed to the state’s bad geographic luck, as places with poor air quality tend to be in “smog-trapping” valleys, such as San Joaquin. According to the Air Resources Board report, 37% of emissions comes from transportation, 21% from industrial sources-such as oil production and refineries- and 19% from electrical power. The remainder is a mix of commercial/residential, agricultural, recycling and high GWP (global warming potential) gases.
How does California's cap-and-trade system compare with other states' environmental policies?
Despite controversy over its effectiveness, there is little doubt that California has taken the lead on setting ambitious climate goals and enacting the regulatory policy to back it up. After all, CalEPA is considered the strictest state environmental agency in the country. Even before the federal American Clean Energy & Security Act was passed in the House in 2009 (subsequently dying in the Senate), California had already voted yes to a statewide cap-and-trade system 3 years prior. It was finally implemented in early 2013 and was the first of its kind in North America, as it encompassed multiple sectors responsible for GHG emissions. Seven Northeastern states had adopted the RGGI (Regional Greenhouse Gas Initiative) in 2005, but the emissions were only applicable to the power sector. The Midwest Greenhouse Gas Accord was established in 2007 as a cap-and-trade program among nine midwestern states and the Canadian province of Manitoba, but the goals have not been active nor ambitious in recent years. While it’s not a cap-and-trade system per se, Washington state has also gotten serious about their emissions when they passed the Clean Air Rule in 2016 which allows emissions to be traded but not purchased.
How does cap-and-trade work?
If a government is serious about curbing carbon emissions, they usually do so by implementing a carbon tax or using the cap and trade system. While carbon tax legislation has been introduced more recently in several states, there is currently no program that has become law within the US. However, other countries have adopted this framework to a degree, including the UK and Sweden. Cap-and-trade is a bit more common, and while it is undoubtedly complicated, the diluted version of California’s program runs like this:
The California Air Resources Board (ARB) implements the program in which there is a limit, or “cap” to the amount of GHG certain industrial sectors are able to emit. This rule applies to large electric power plants, industrial plants, and fuel distributors (i.e., natural gas and petroleum) who emit at least 25,000 metric tons of CO2 equivalent per year. Organizations are entitled to a certain number of “free emissions” based on various industry benchmarks which essentially allow them to use up to a certain amount before they have to purchase additional allowances. These additional allowances can be bought during quarterly auctions, and they grant companies permission to emit more GHG. The minimum prices are designed to increase 5% annually, adjusting for inflation, and the overall cap decreases 3% each year between 2015-2020. GHG emissions must also be reported annually to the ARB and verified by a 3rd party.
Has it been effective?
California’s primary goal is to reduce GHG emissions to 1990 levels by 2020 (431 million metric tonnes) and 40 percent below 1990 levels by 2030. In 2017, the ARB published a report on emissions inventory between 2000 to 2015. The levels technically dropped from 445.08 million metric tonnes of CO2 equivalent in 2013-when the program launched- to 440.36 in 2015. It is hard to gauge the programs’ overall effectiveness with only 2 years’ worth of data, but the good news is that emissions have indeed decreased in total from 467.19 in 2000.
When renewing the program in 2017, many environmentalists felt the regulations were too soft on big oil, as state officials negotiated to strip away control from local air boards, who often want to impose heavier restrictions for nearby refineries contributing to their region’s pollution levels. While the newer provisions may not be viewed as tough enough on big oil, the emissions from industrial sources-which include oil & gas production, refineries- have decreased from 93.48 million metric tonnes (CO2 equivalent) in 2013 to 91.71 in 2015 (levels were 96.24 in 2000). To be fair, the subsector of oil refineries increased slightly within those 2 years; however, the biggest emissions increase came from the transportation sector, largely from passenger vehicles. Both the electric power and commercial/residential sector have experienced decreases since the start of cap-and-trade.
Where do the proceeds from the auctions go?
Whether or not tougher revisions are needed, the effect it’s had on many California communities has been positive. In 2012, California Senator Kevin de Leon sponsored SB 535, which carves out 25% of emission auction proceeds for disadvantaged communities (measured largely by air quality and pollution), and in 2016, AB 1550 increased that to 35% with the additional funding prioritized more for low-income communities. With 8 cities and regions consistently ranked in the top 10 as the most polluted in the US, it’s hard to argue against the allocation of funding. The largest stretch of high air pollution levels lies within the San Joaquin Valley which stretches from Stockton down to Bakersfield. Others include parts of Los Angeles County and East Bay in Northern California. It is also hard not to notice that the Office of Environmental Health Hazard Assessment’s (OEHHA) state map reflecting areas of high poverty largely mirrors the areas with high pollution levels.
Fortunately, according to the 2018 report that summarizes the investments from cap-and-trade proceeds, 37.1% went to Los Angeles County, 24.6% to Bay area, 16.5% to the San Joaquin Valley, and 8.4% to San Diego region. The remaining 12% was divvied up throughout the rest of the state. Projects range from explicitly targeting emissions goals to sustainable projects that will benefit low-income individuals and families, such as the addition of new bus routes.
UC Berkeley School of Law published a report on the economic impacts of the 3 main environmental policies on the San Joaquin Valley, including cap-and-trade. From 2013-2015, the direct net impact of cap-and-trade alone was $119 million with 709 direct jobs created. The calculation comes from the $200 million cost of compliance requiring 151 jobs, subtracted from the $319 million Greenhouse Gas Reduction Fund (GGRF) implemented revenue-or essentially the proceeds from the auctioned allowances-and 860 additional jobs. The report also showed how indirect factors affected the overall economic activity, and with this calculation, the region experienced a net positive economic impact of $202 million. According to the report, “...despite the modeled negative impact indicating the contraction of 428 jobs in emission intensive industries due to cap-and-trade compliance, there has been no evidence of actual job loss in the region. In fact, total employment, personal income, and household incomes rose over the first three years of cap-and-trade implementation.”
While the program is still too new to solidify the long-term economic and environmental impacts, there is substantially less controversy over investment in highly-polluted and disadvantaged communities. While concessions to “big oil” and other pollution culprits may not be favorable, California’s environmental goals are still some of the most ambitious in the country.
Sources (in order of appearance)
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