California and AB32:

2008: ARB Scoping Plan may discuss designs for California's Carbon Market

In 2006 California passed the Global Warming Solutions Act (AB32), committing the state to reduce carbon dioxide emissions to 1990 levels by 2020. AB32 gave the California Air Resources Board (CARB) the authority to impose an economy-wide cap on state-wide greenhouse gas emissions. CARB has a multi-track process which includes considering market mechanisms in its Scoping Plan.

We will be following the discussion of market mechanisms in the ARB's AB32 Scoping Plan.
Recent public hearing: January 16, 2008 in Oakland, CA, next hearing April 4, more info coming soon.

Recent comments on the AB32 Scoping Plan:
CPC Four Design Recommendations 11-20-07 (pdf)
CPC Comments on ARB Scoping Plan 11-29-07 (pdf)

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January-June 2007:
Market Advisory Committee considered designs for California's Carbon Market

In 2006 California passed the Global Warming Solutions Act, committing the state to reduce carbon dioxide emissions to 1990 levels by 2020. A Market Advisory Committee (MAC) was formed to advise the state on market measures, especially cap and trade. Dozens of citizens provided public comments to the Market Advisory Committee, including:

• Polluters should pay to use the atmosphere, and revenues should be used to compensate residents for higher energy prices and invest in a clean energy future.
• The carbon cap should cover all carbon entering the economy.
• Companies should not be allowed to buy cheap offsets overseas.

Public Comments regarding AB32 and Cap and Trade: A Carbon Market for Public Trust & the Environment (pdf) CPC Comments to Market Advisory Committee 2-27-07 (word) RP Comments to Market Advisory Committee (word) CTR Comments to Market Advisory Committee (word) Peter Barnes testimony to Market Advisory Committee (word) Three Recommendations for a Carbon Market by CPC (pdf) More February 27, 2007 Comments (on CalEPA website) Comments on MAC Draft Report: Peter Barnes on Draft MAC Report 6-5-07 (word) CPC Comments on Draft MAC Report 6-6-07 (word) CPC Background Materials on Comments (pdf) CTR Comments on Draft MAC Report 6-12-07 (word) 16 Env Groups Sign-on letter on Draft MAC Report (pdf) 66 citizen comments on Draft MAC Report (pdf) More June 12, 2007 Comments (on CalEPA website)

The Market Advisory Committee Final Report contained several interesting sections. Section 6.1.2, page 56 is on Use of Allowance Value- the topic of our recent workshop.

"The Committee believes that it is appropriate to devote a portion of allowance value to the general public. In doing so it reduces the impact of the cap-and-trade system on consumers. If allowances are auctioned, some of the revenue from the auction can be used to finance reductions in State tax rates, or can be returned to taxpayers directly through rebate checks, perhaps on a per-capita basis."

"CARB may wish to convene an advisory group involving persons with budgetary experience and wide knowledge of energy, environmental, tax and budgetary policy, and including representatives of both the Department of Finance and the Legislature, to prepare a study outlining several sensible options for recycling revenues to businesses or individuals."

"Some observers have suggested that CARB may not have the authority to auction and that auctioning might require further legislative action. If this is the case the agency could consider a number of alternatives to implement a design that would resemble an auction, including allocation to a public trustee, LSEs, or local distribution companies who could
auction allowances on behalf of the state’s citizens, or direct allocation to households."

On page 68, the report discusses the need for a price floor:

"While a price ceiling could jeopardize environmental integrity and reduce the return on investments in clean technologies, a price floor would reinforce environmental integrity and the value of clean investments. The Committee encourages CARB to consider enforcing a price floor."

A carbon fee could become the price floor.
Here is a factsheet on the difference between a carbon tax and cap and trade system.
Here is a second factsheet which describes how a carbon fee could be the price floor for a cap and auction system.

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Background information

About AB32:

In September 2006, the State set statewide greenhouse gas (GHG) reduction targets by adopting AB32, the California Global Warming Solutions Act. The State committed to reducing emissions to 1990 levels by 2020. The State will enact policies that cause a reduction of an estimated 174 Million Metric Tons of GHGs. In 2007, the California Air Resources Board (CARB) will begin implementing California’s greenhouse gas targets. CARB has scheduled several upcoming events related to the implementation of AB 32. The events webpage also contains an archive of comments and presentations from meetings throughout 2006 and 2007.

One of the options the state is looking at to reduce greenhouse gases is a cap and trade system. Emissions are capped, rights are distributed, and the market sets a price for carbon.

About cap and trade:

• Carbon cap and trade is a market-based way for a state to combat climate change.
• The state ‘caps’ total CO2 emissions and issues that number of emission permits annually.
• The number declines from year to year until a safe level of emissions is reached.
• Companies must acquire permits in order to emit CO2 or bring carbon into the state.
• Companies can buy and sell permits.

Capping carbon creates economic value
• Without a cap, the value of carbon = 0.
• With a cap, the value of carbon > 0.
• Because of the law of scarcity, as the supply of carbon permits decreases, their economic value rises.
• When valuable new property rights are created, who gets those rights is a political issue.

"Cap and Trade" became a controversial issue during the negotiation of AB32. One of the main concerns was who gets the emission rights?

Who gets the emissions rights? How are the rights distributed?

In 2007, the California Air Resources Board and the Market Advisory Committee will consider whether to:

• auction (sell) permits to fossil fuel importers and producers, and use those revenues for public goods such as energy efficiency, or to offset disproportionate impacts to low-income households which may result from a rise in the price of fossil fuel.
  
  - or -
  
  
• giveaway permits to the fossil fuel industry for free.
  

Emission Rights Allocation Options:

1) Auction (selling): The state auctions permits to companies for whatever the market will bear. The state uses the auction revenue for: - Investment in new energy infrastructure and other public goods - Rebates or dividends to consumers

2) Giveaway: Emission permits are given to fossil fuel companies for free. The more a corporation polluted in the past, the more permits it gets. Result: windfall profits for the fossil fuel industry, and no public benefit.

Which allocation methods support the public trust?

Public Trust Allocation vs Giveaway:

	Auction	Giveaway
Who gets the emissions rights	Government or trust on behalf of consumers	Fossil fuel importers and producers
How are rights allocated, and how are revenues used	Auction to companies, revenues used for -public goods, energy efficiency, R&D, transit, etc. -and/or dividend returned to consumers per capita	Given to historic emitters for free, no revenues for public trust purposes, all benefit goes to emitters
Serves Common Good?	Yes	No

How to use the revenue from an auction:

1) Public Goods Auction: The State sells the rights to the highest bidder, then uses the proceeds to fund public goods such as energy efficiency, renewable energy, research, or other projects to reduce more greenhouse gases.The public goods investments can accelerate GHG reductions and ease the transition to low-GHG technologies and lifestyles.

2) Auction with Dividends: Similar to Public Goods Auction, the State sells the rights to the highest bidder, then uses the proceeds to provide cash dividends to consumers on a per capita basis.The consumer rebate compensates for higher fuel or energy prices. Carbon conservers come out ahead, while carbon guzzlers pay more.

3) Carbon Share: The State distributes a carbon share to each consumer. Consumers cash the share at a bank or brokerage.The bank or broker sells the share to carbon importers and producers on the open market.

About per capita compensation: Limiting carbon emissions will most likely raise fossil fuel prices. Distributing 'consumer dividends' or 'carbon shares' can reduce the impact of higher fuel prices on households.

Consumer compensation on a per capita basis would institutionalize equity and address disproportionate impacts to low-income households. A rise in fuel prices has a regressive impact, since low-income households spend a greater portion of their income on necessities like fuel. But the amount they spend is typically lower than high-income households. A per capita rebate, dividend, or share would help low-income households (who typically use less fossil fuel) more.

Two types of per capita compensation are Dividends and Carbon Share. With dividends, the State auctions all permits under the cap and provides a cash dividend on a per capita basis to Californians. In Carbon Share, the State distributes the CO2 under the cap as per capita "shares" of CO2 to all Californians. Citizens cash the shares at banks and brokers. Banks and brokers sell the shares to the regulated companies on a private exchange. As the price of CO2 rises, the value of the dividend or Carbon Share would rise. Because consumers are receiving the scarcity rents from the increased prices of fossil fuels, consumers may continue to provide popular support for further emission reductions.

Analysis: Auction and Carbon Share can co-exist. Public goods investments can help society make the transitions needed. The Dividend reimburses consumers for increased fossil fuel prices, and helps the hardest hit the most. Carbon Share has the same economic effect as the auction, including revenue recycling to consumers, but involves the financial services industry, providing an alternative to a government-run auction.

Recommendation: Auction (sell) 100% of permits. Use revenues for Public Goods investment and per capita compensation. Per capita compensation could be accomplished by a dividend or Carbon Share.

The California Air Resources Board and State Legislature need to hear from their constituents.

Questions for CARB:

How will CARB implement the cap? Will CARB give the emissions rights under the cap 1) to consumers, 2) to auction by the State, or 3) to the fossil fuel industry?

Will CARB learn from the mistakes of previous cap and trade systems such as RECLAIM and Europe’s Emissions Trading System?

Who gets the emissions rights? How to spend the revenues from selling emission permits?

Suggestions for CARB:

1) Auction (sell) 100% of carbon emission permits. Revenues should be used for public goods and per capita compensation. The State should consider the Auction with Dividend and Carbon Share and other forms of consumer per capita compensation in the design of a California carbon market.

2) Remove the giveaway (grandfathering) from further consideration. Implement an upstream, 100% auction system with consumer compensation.

3) Conduct or commission a technical study on public trust allocation and per capita compensation, including the Dividend and Carbon Share. How could the State implement a Carbon Share program? How does Carbon Share compare with other cap and trade options for GHG reduction in achieving the AB32 Market Advisory Committee's Market Design Guiding Principles? Is Carbon Share part of the best approach to allocating emission rights? Which agency would manage a Carbon Share program? What role should the financial services industry play in the development of the program?

4) Study per capita consumer compensation, including per capita cash dividends, and Carbon Share.

Click here to endorse the Carbon Share approach.
Send us an email to get more involved in promoting Carbon Share.

More about allocation options.

More information on the State of California's Climate change activities can be found at the California Climate Change Portal.