California Proposes Direct Rebates On Climate Bill While Pressing Ahead On RPS*

Fereidoon P. Sioshansi** (Fpsioshansi@aol.com)

Sometimes one gets the impression that California is not only on a separate continent than the rest of the United States, but perhaps on a different planet altogether. Despite the state’s serious budget woes and double-digit unemployment rate, California appears committed to its ambitious climate goals – in stark contrast to the prevailing sentiment in Washington or the climate debacle in Copenhagen.

 

 

Figure 1. Brother, can you spare 169 million metric tons of CO2 equivalent?

California’s climate bill requires statewide emissions to be reduced to their 1990 level by 2020

Source: CARB June 2008

 

Following years of negotiations at multiple venues, the delegates attending the UN-sponsored conference in Copenhagen in December 2009 could not agree on a target or a deadline to reduce global greenhouse gas emissions. Likewise, a meek bill passed last June on a razor thin 297-292 vote in the US House of Representatives would only deliver a 17% reduction in greenhouse gas emissions from 2005 levels by 2020 – an un-ambitious target – while giving away billions in subsidies and free allowances to polluting industries.

The US Senate, distracted by the contentious debate on health care, has shelved a similar bill following a frosty reception from hostile senators from coal-burning states and heavy industry lobbying. Not much progress is expected this year, with November’s mid-term elections on top of everyone’s agenda. President Obama, many observers believe, will be focused on jobs and the ballooning fiscal deficit – which means that climate change will have to wait.

California, on the other hand, is pushing ahead with its own climate bill to reduce statewide emissions to 1990 levels by 2020 – far more ambitious than the House Bill and independent of what happens at the federal level – which appears to be absolutely nothing.

The question that everyone wants to know is what makes California and its policymakers so different than everyone else? The second question is whether California can pull it off, i.e., manage to meet its 2020 climate target without ruining its economy in the process – a big if.

 

California’s Climate Bill

In 2006, the state of California passed the Global Warming Solutions Act, better known as Assembly Bill 32 or AB32, requiring statewide greenhouse gas emissions to be reduced to 1990 levels by 2020. Governor Arnold Schwarzenegger, an enthusiastic supporter of the bill, signed it into law and designated the California Air Resources Board (CARB) to implement it. As if that was not enough of a challenge, through an Executive Order, the governor set California’s Renewable Portfolio Standard (RPS) at 33%, also by 2020. The governor is trying hard to make this into law before leaving office, intent to make it a legacy of his tenure.

Early in its deliberations, CARB decided that achieving the ambitious deadline could not be left entirely to market forces and pricing schemes. Some 75-80% of the measures required to meet the 2020 reductions in greenhouse gas (GHG) emissions will be met through brute command and control provisions, notably the 33% renewable portfolio standard (RPS), stringent energy efficiency initiatives as well as a long list of other mandatory requirements affecting the transport sector – CARB’s biggest headache. The balance will be met through market and pricing oriented mechanisms, including auctioning of GHG emission permits.

The permits, which will have to be obtained by polluters including utilities, refineries and heavy industry – of which California has little to speak of – starting in 2012, are expected to raise $2 billion starting in 2012, rising to an estimated $22 billion by 2020 when the law’s target has to be met. Until recently, it was not entirely clear what would happen to these proceeds. In the midst of massive budget deficits, state lawmakers may be tempted to tap into the funds.

In early January, a 16-member Economic and Allocation Advisory Committee (EAAC) advising CARB on such matters proposed that roughly 75% of the collected proceeds should be distributed directly to households with the balance used to assist badly affected industries especially those with few options to transition to a lower carbon regime.

While the panel’s recommendations are neither final nor binding, the news spread fast and is being debated in circles far from California’s borders. As proposed, it would mean that a California family of 4 would receive an estimated $388 in 2012, rising to $1,036 by 2020, or roughly $7,000 over the 8-year period 2012-2020.

The rationale for the direct allocation is that consumers would, by and large, be paying for higher energy prices and services resulting from the collected carbon fees and hence they should receive the dividends. But why bother taxing them, in effect, in the first place and reimbursing them after the fact?

The reason, according to EAAC, is that higher energy prices and prices of energy-intensive products/services would encourage consumers to use less and to switch to low-carbon alternatives, and that is the intent of the punitive emission fees. If consumers reduce carbon-intensive purchases because they cost more, less carbon will be emitted, plain and simple.

There is some debate on whether this well-known economic theory would work in practice. Critics point out that the great majority of electricity consumers, for example, do not know the unit price of electricity they consume hence what hope is there that they would conserve once the carbon fees are added to the current retail prices? Proponents say that consumers will notice higher bills even if not the higher rates, and that is good enough to encourage electricity conservation.

For consumers who manage to change their habits and/or lifestyles away from carbon-intensive products and services, say by getting rid of a gas guzzling Hummer and switching to mass transit or bicycle, there could be significant savings in lower energy costs plus the rebate – so some customers could conceivably enjoy a net gain from such a scheme, and that is the sort of behavior that the scheme would wish to encourage.

Aside from its sheer simplicity and ease of administration, the scheme suffers from many flaws and imperfections. For example, a poor family with a long commute to work on an old and inefficient gas guzzler would receive the same rebate as a rich retiree who has little or no fuel expenses. But to take account of such details, the scheme would have to get complicated.

In contrast, the Waxman-Markey Bill that barely passed the House of Representatives last June would give most of the proceeds to utilities and other polluting industries, rather than directly to consumers. The critics say polluting utilities may use the proceeds to keep electricity prices low – hence removing any incentives for consumers to use less.

Clearly, any scheme short of an economy-wide carbon tax – not popular even in green California – would result in distortions and imperfections.

Economists will continue debating the pros and cons of alternative schemes, including the costs of administration. With little expected at the federal level and an embarrassing stalemate at Copenhagen, California appears to be the only game and may become the proving ground for direct payment scheme enticing – or scaring – others to try similar measures.

Not everyone, of course, is happy with AB32 especially in view of the current unemployment rate and the state’s budget deficit. A new initiative hoping to receive sufficient signatures to make it on the Nov 2010 ballot would suspend the state’s climate bill, AB32, until state’s unemployment – currently at 12.4% – drops below 5.5%. Sponsored by Republican Assemblyman Dan Logue, it has the support of the usual suspects.

Most observers believe that the climate bill is a longer-term objective that should not be affected by short-term budget deficits or unemployment levels. Industries and businesses need clarity and certainty to make the necessary adjustments and such mid-course corrections would not be helpful.

 

Renewable Portfolio Standards

Realizing that setting California’s Renewable Portfolio Standard (RPS) at 33% by 2020 is necessary but not sufficient to make the state’s many overlapping bureaucracies move, in November 2008, the Governor has attempted to streamline the cumbersome renewable energy permitting process. He instructed the California Energy Commission (CEC) and California Department of Fish & Game to cooperate with the federal Bureau of Land Management (BLM) and the Department of Interior (DoI) to expedite the licensing and approval process. The so-called Renewable Energy Action Team or REAT have been told to prioritize renewable energy projects above all else.

REAT is reviewing applications for proposed renewable projects; the CEC is working on projects that are not on federal lands while coordinating with BLM and DoI on those that are. California currently has over 8,000 MW of non-hydro renewable capacity, and needs an additional 15-25,000 MW to reach its 2020 target depending on assumptions about capacity factor, availability of transmission and a myriad of other variables.

But no matter how you count the numbers, the 33% RPS target – now a mere decade away – seems like a stretch. According to one estimate, the state will need nearly 18,000 MW of new wind, solar, geothermal and biomass – assuming a 25% average capacity factor – by 2020. While this much new capacity can be built, there is less certainty about the availability of transmission lines to transfer the renewable energy to major load centers and to effectively integrate them into the grid. Transmission constraints, experts agree, will be more of a challenge than the renewable capacity itself.

 

Table 1. Much more to meet the target

Procurement needs of California investor-owned utilities to meet state’s 2010 (20%) and 2020 (33%) renewable portfolio standards (RPS), in GWh and GW

Source: California’s investor-owned utilities

 

To get a sense of the difficulties ahead, currently some 250 proposed renewable projects are awaiting one or more state or federal regulatory approvals. Many are proposed in sensitive habitats with endangered species, some lack adequate water resources necessary for solar thermal and geothermal projects, many are nowhere near existing transmission lines while others are dependent on 30% tax credits available under President Obama’s stimulus funding, the American Reinvestment & Recovery Act.

Undaunted, Governor Schwarzenegger has not changed the official line. He says, “California is a pioneer in renewable energy, green jobs and environmental protection,” adding, “This list of nearly 250 projects is great news for our state because, not only will these projects help us meet our long-term environmental goals, they will also create green jobs and new, clean investment in our economy now.” Others do not see the backlog of applications as trivial or great news as the governor does.

 

Figure 2. Moe - or less - on track

Estimated emission reduction levels achieved by proposed measures under CARB's scoping plan

Source: CARB 2008

 

In the meantime, the California Independent System Operator (CAISO) has proposed a new scheme for aggregating many transmission-related applications for renewable projects from the same geographical area into a new and theoretically fast-paced process to meet the 33% target – but critics contend that it has merely replaced one slow and bureaucratic process with another. Building transmission lines, never an easy proposition in California, has gotten even more difficult now that so many new lines are needed to bring in renewable energy from remote parts of the state.

Yet, there are signs of progress here and there. Various state agencies, notably the CEC, CARB, CAISO, the three investor-owned utilities and the regulator, California Public Utilities Commission (CPUC), appear to be working more in unison, united by the formidable challenge to meet AB32’s requirements.

A recent report prepared for the CEC titled Framework for evaluating greenhouse gas implications of natural gas-fired power plants in California by MRW & Associates concludes that the 33% RPS target will deliver 21.3% of the estimated emission reductions for 2020, followed by the state’s aggressive energy efficiency initiatives at 19.5%. The other measures – and there are many – help, but not nearly as much.

 

* This article is excerpted from the Feb 2010 issue of EEnergy Informer.

** Menlo Energy Economics.

 

Click to view a printable version of this article.