The California Global Warming Solutions Act: Theory & Praxis

1. The California Global Warming Solutions Act: Theory & Praxis Presentation by Bruce H. Jennings Senate Environmental Quality Committee Combating Climate Change on the Regional Level: West Coast Policy & Litigation Knight Law School University of Oregon October 19, 2007

2. Statutory/Policy Context • 35 years of progressive energy and environmental action • 1972-Energy Conservation, Renewables • 1980’s- CA Clean Air Act • 1990’s public goods charge • 2000’s RPS, Solar Initiative, “California Emissions Standard”

3. Political Context • Market Failure: Increasing recognition by private sector of the problem of market mechanisms:“When people do not pay for the consequences of their actions, we have market failure. This [climate change] is the greatest market failure the world has ever seen.”Sir Nicholas Stern Former World Bank Chief Economist

4. Schwarzenegger Adm. Position • Targets must be “flexible”—no “hard” caps, only “goals” • Political, Sub-cabinet “Climate Action Team” must oversee implementation (not independent agency) • Market-mechanisms mandatory, not subject to any substantive tests (e.g. effectiveness, enforceability etc.) • Minimize regulation, maximize “incentives”

5. Senate’s Position • Frustration over lack of coherence in bill content (broader member/staff tensions) • Hard line on substantive points (enforcement, agency implementation, market-mechanisms) • Concerns over “non-Kyoto” pollutants

6. Final Negotiations: August 2006 • Key “closers” • GHG carbon fees (to fund program, promote emission reductions) added • Role of voluntary “Climate Registry” clarified • Market-based compliance mechanisms (optional, conditions for use specified ) • “early action items” final issue

7. AB 32-CA Global Warming Solutions Act of 2006—key provisions • Designates CA Air Resources Board as “lead agency” for climate change reductions. • Establishes explicit deadlines for ARB to do following: • Adopt early action measures to reduce GHG (7/1/07)

8. AB 32--Key Provisions (cont.) • Adopt mandatory GHG emission reporting for sources (1/1/08) • Adopt 2020 “cap” on state emissions based on 1990 levels (1/1/08) • Adopt “scoping plan” to achieve maximum technologically feasible and cost-effective reductions in GHG emissions to meet cap.

9. AB 32-Key Provisions (cont.) • As part of plan requires evaluation market-mechanisms, economic impacts and benefits, impacts on electrical sector. • Requires adoption of GHG emission limits and reduction measures (1/1/11) and makes them enforceable no later than 1/1/12 • Establishes criteria/considerations for regulations

10. AB 32-Key Provisions (cont.) • Authorizes adoption of “market-based declining annual aggregate emission limits” (i.e. “cap and trade” (1/1/11) and other market mechanisms subject to conditions: • Emission reductions must be “real, quantifiable, verifiable, and enforceable” under state law • Emission reductions must be “surplus” above any other requirements of law (no double-counting)

11. AB 32- Key Provisions (cont.) • Emissions must be in addition to any reductions that “otherwise would occur” (no credit for status quo) • Consult and work with state energy agencies on electricity and natural gas sectors • Consider EJ, other localized impacts of market-based mechanisms

12. AB 32--Key Provisions (cont.) • Requires adoption of regulations/methodologies governing how market-mechanisms/voluntary actions are counted and enforced by regulated entities • Establishes civil, criminal, and administrative penalties to be imposed by ARB for noncompliance (commensurate with other AQ violations)

13. AB 32-Key Provisions (cont.) • Requires “backstop” if California emissions standard overturned. • Requires establishment of EJ Advisory Committee and Economic and Tech Advancement Advisory Committee. • Authorizes imposition of fees “for the purposes of carrying out” the law. • Allows Governor to “adjust” deadlines for reductions under “extraordinary circumstances, catastrophic events, or threat of significant economic harm..”

14. AB 32--Key Provisions (cont.) • Establishes affirmative obligation of all state agencies to take action to reduce GHG emissions • Severability Clause

15. Challenge by Executive Order • Less than two weeks after bill was signed, Governor issued his “executive order” • Key provisions • Designates CAL-EPA (not ARB) to oversee key implementation issues • Establishes new “market mechanism” advisory committee not in law

16. Governor’s Executive Order (cont.) • Market mechanisms and command and control should be on same timeline (inconsistent with law) • Linkage to RGGI, British trading schemes, Western Governors Association. • Speaker/Perata lodged objection to EOof CARB • Reallocation of the Governor’s Budget

17. Implementation: Emerging Issues • Law says: • Adopt early action measures • Adopt mandatory reporting • Adopt overall state “cap” • What are “market-mechanisms” to be adopted, how do these relate to existing law provisions, and what is the sequencing of implementing such a program vis a vis early regulatory actions? • The firing and resignation of the primary officials responsible for the implementation of AB 32 due to “political interference from the Governor’s Office” regarding adoption of early action measures.

18. Litigation & the Attorney General • The Attorney General and the Automobile Companies • The Attorney General and Land Use Planning;San Bernardino and Emissions Reductions • The Attorney General and Ship Emissions

19. Unresolved Issues • Forestry – How real are the alleged savings? Conflicting research. • Agriculture – What are the metrics to address (e.g., water pumping, methane) • Alternative Fuels – How does energy policy relate to GHG and carbon policy? Is there any savings or will this delay the transformation of the energy sector to an authentic RPS? • Chemical Policy – How does GHG/Carbon Policy relate to chemical policy? • Transportation Policy – How do transportation bonds relate to GHG/carbon policy (e.g., cars vs. mass transportation). • Clean Technologies: Will GHG/Carbon Policy fundamentally transform the fossil fuel economy. Does AB 32 contain mechanisms that are technology forcing (e.g., AB 1493, SB 1368)?

20. Federal Legislation • Cap & Trade with a twist: ceiling on emissions pricing? • Escape valves? • Absence of an aggressive regulatory framework? • Robert Reich & green corporate actions: “Hold the applause…..Government must lead.”

21. Opportunities Cool Cities Carbon Trust Carbon Fees & TaxesClean Technology A New Political Economy?

22. What Is the Consequence of Another Market Failure, including the Market Mechanism Provisions of The Global Warming Solutions Act?What “triggers” might be constructed to address such a potential failure?

23. SB 1368 (Perata) • GHG emissions performance standard applicable to all retailer sellers of electricity • Standard: clean or cleaner than combined-cycle natural gas generation facility • Enforced by state energy agencies (public utilities commission/energy commission)

24. AB 2021 (Levine) • Requires municipal utilities to meet targets, spend as much as IOU’s on energy efficiency • Administered by state energy commission • Goal: Get muni’s to commit to increased invesment in EE to match IOU’s

25. Environmental Groups • Key Issues • Overall “cap” on state emissions • Binding and enforceable targets for emissions reductions • Mandatory reporting of emissions • Competent/effective state agency implementation of law with due process (ARB)

26. Business Opponents’ Arguments: • Key Arguments • Jobs will flee the state • Gasoline prices and costs of goods will go up • Taxes will increase due to “hidden carbon tax” • State’s economy will shut down • Key tactical decision by opponents—no compromise—oppose at all costs

27. Business Proponents Arguments • Similar environmental arguments as enviros • Need to transition to new “low carbon” economy • Good for businesses who are the future of the state and world • CA will become the incubator for billions in new high tech investments • Utilities—”we’re doing it already under CA law”

28. Early Developments • Governor’s Executive Order—press announcements25% reduction in GHG’s by 2020, 50% by 2050 • Climate Action Team Report—policy options, including fees and taxes on sources of GHGs • Introduction of bill package (GHG emission performance standard, petroleum demand reduction, AB 32)

29. AB 32—Global Warming Solutions Act • “Dramatis Personae” • Key Environmental Groups (NRDC, ED, EJ groups, others) • Anti-AB 32 business groups (CA SEE, State Chamber, WSPA, • Pro-AB 32 business groups (Environmental Entrepreneurs, silicon valley, PGE • Administration, Assembly authors, Senate

30. Political Context • Increasing Evidence of Global Warming and the Premium of Near Term Actions • Expanding constituencies’ concern regarding global warming. • Expanding Role of States with Environmental Policy and the corresponding failure of federal policy. • Media – Inconvenient Truth.

31. Final Negotiations: August 2006 • Round-the-clock meetings among Governor’s staff, CAL-EPA staff, Senate/Assembly staff • Some issues resolved first: • Program Implementation: ARB chosen over “Climate Action Team” • Strict cap, mandatory reporting, strong civil and criminal penalties added • EJ advisory group added

32. Final Negotiations: August 2006 • Governor balked at making market-mechanisms optional and at imposing early action requirements • Initially said he would veto the bill, then called Speaker back an hour later to say he’d sign it. • Announcement, fanfare…….implementation?

33. AB 32--Strengths • Implementation in hands of independent board, world-class environmental agency • Strict accountability and deadlines for ARB actions, GHG emission reductions • Strong civil, criminal penalties for non-compliance • Strict, clear definitions for key terms under law

34. AB 32—Strengths (cont.) • Authority to impose fees, use market mechanisms other than cap and trade (i.e. fee-bates, incentive-based charges etc) • Strong public notice and hearing requirements, and EJ consultation. • Clear obligations on all agencies to do their share.

35. AB 32--Weaknesses • Significant regulatory discretion to ARB • Long time frame for implementation • Deference to state energy agencies for utility implementation • Carbon fees optional • Governor extension/suspension provision • Other issues (ongoing research, climate effects mitigation)