State climate deal could benefit polluters
Bill extending California’s cap-and-trade program may net big bucks for oil and agriculture industries
Against the sparkling backdrop of sailboats bobbing on San Francisco Bay, Gov. Jerry Brown last month signed a bill extending California’s cap-and-trade program, assuring that the most high-profile piece of the state’s fight against climate change persists for another decade.
In a Sacramento hearing room two days later, the California Air Resources Board approved a paragraph, tucked within a 17-page resolution, that will likely result in benefits worth hundreds of millions of dollars for the oil and agriculture industries. It was the first domino to visibly fall as a consequence of behind-the-scenes dealmaking that produced a cap-andtrade program acceptable to both key environmental groups and major polluters.
The air board’s generous impulse toward those polluters was an abrupt reversal of previous plans, ran counter to staff recommendations, and left at least one confused board member later saying he wished he had abstained from voting.
Although the board’s move was not written into the cap- and- trade legislation Brown signed, the bill’s author acknowledged it was a necessary concession in the scramble to secure its cliffhanger passage in the Legislature. Cap and trade, which lawmakers extended until 2030 with a bipartisan vote, is supposed to help California slow global warming by forcing industry to either operate more cleanly or pay to pollute.
“It was part of the deal to make sure we could get a (two-thirds) vote to extend the cap and trade program,” said Democratic Assemblyman Eduardo Garcia of Coachella. “Without a doubt, it’s a compromise in order to reach the greater goal, and at the same time, to put forward what would be the nation’s strongest air quality policies that you could ever see.”
The deal would provide maximum compensation to companies for the extra cost of doing business in a state with the nation’s toughest emissions standards. But some critics say it merely gives a lucrative financial leg-up to polluting firms that don’t need it — and by removing some of those firms’ incentives to reduce greenhouse gas emissions, could even undermine cap and trade’s prime goal.
The complex program, which took effect in 2013, illustrates the delicate balancing act California is trying to pull off as it works to lead the world in aggressively combating climate change while simultaneously fostering a robust economy.
Here’s how it works: California sets a steadily- decreasing “cap” on greenhouse gas emissions each year, and sells major businesses permits, known as allowances, allowing them to pollute. To ease the burden on industry, the state also gives many permits away for free. That allocation is determined by a complicated formula that depends, in part, on how likely the companies are to flee the state if regulations become too financially burdensome.
The air board has grouped businesses into three categories based on whether they are at high-, medium- or low- risk of moving out of state. Each category is assigned an “industry assistance factor” that plays into the formula for free allowances.
High risk industries such as oil and gas producers are guaranteed 100 percent assistance in perpetuity. The two other categories have been receiving maximum assistance since 2013, but that was scheduled to drop next year.
That meant hundreds of businesses — primarily oil refineries, but also fruit and vegetable canneries, large wineries and breweries, plaster and stucco manufacturers, and assorted other smokestack industries — were slated to receive fewer free allowances for three years.
The system was designed to be generous in the early years of the program, but as businesses adjusted, the state intended to wean companies off the allowances. In recent years the air board staff has even recommended dropping below the 75 and 50 percent reductions scheduled to take effect next year.
But each time the board considered peeling away some of the allowances, California businesses have fought back with chilling declarations of financial ruin.
At the July meeting, the board unanimously passed a resolution asking staff to produce a regulation change that would keep all California’s covered industries at the 100 percent assistance rate. It will make a final decision later, although dozens of lobbyists at the meeting lined up to offer their thanks as if it were a done deal.
The air board’s move would ensure industry the maximum assistance through 2020. The cap-andtrade bill then guarantees it from 2021 to 2030. The upshot: California will have bestowed the biggest possible financial cushion to every polluter in the state for the entirety of cap-and- trade’s existence.
Gov. Brown’s office referred reporters’ questions to the air board, which is part of his administration. The board chair — a Brown appointee — said she was not privy to legislators’ deals.
There was much that was unusual about the agency’s recent meeting. The actual resolution the board considered, as well as the staff’s discussion, was not publically available prior to the meeting. In fact, the proposal and affiliated documents were not posted on the air board’s website until a week after the vote.
One board member said that during the meeting there was confusion about what the panel was voting on, and called the process rushed and sloppy.
Since the board’s vote last month, a leading energy economist has determined that extending the higher rate of industry assistance for three years would amount to a $300 million benefit to oil refineries. The boon to other emitters — such as food processors and aerospace manufacturers — would likely come to tens of millions of dollars.
“If the Legislature comes in and says, ‘ We don’t care what experts say about allocations, we still want to give away more,’ that’s a political decision and that’s a big part of the politics of (the cap- and- trade bill),” said Danny Cullenward, who works at Near Zero, a climate policy think tank at Carnegie Institution, and teaches at Stanford’s law school.
“But this is specifically going against what, at least as of a couple of months ago, was what the air board said was the right way to approach this.”
The industry assistance program was created to acknowledge that the cost of complying with state rules might place some companies at a competitive disadvantage. In some cases, as with utilities, the free allocations were meant to protect ratepayers from sticker shock.
Businesses say the program helps them keep prices lower for consumers while maintaining jobs in California. Cathy ReheisBoyd, president of the Western States Petroleum Association, said that without free permits to emit greenhouse gases, oil refineries could find it too expensive to do business in California — accelerating a trend that’s already seen the number of refineries in the state drop 50 percent since 1985.
“There’s been a decline in the number of refineries over time due to increasing costs and the difficulty of managing that,” ReheisBoyd said.
Dorothy Rothrock, president of the California Manufacturers & Technology Association, contended that the air board bears the burden of proof to demonstrate that its policies are not harming business. In her view, they are.
Compare investment rates in manufacturing in California to the rest of the country, she said, and the results are “pathetic. It’s really alarming. California is sucking wind.”
It is sometimes difficult to square businesses’ dire depiction of a gasping industrial sector with the governor’s insistence that California’s climate policies have not been a drag on the state’s robust economic engine.
Business officials seldom provide studies or specifics to make their case, saying disclosing that information equates to revealing trade secrets. For the most part, the board has been sympathetic to industry’s needs, having once before cancelled a scheduled drop in cap-and-trade’s assistance to industry.
But economist Stephen Levy said the economic impact of strict emissions rules is actually negligible. “You create some jobs, some jobs are lost,” said Levy, director of the Center for Continuing Study of the California Economy, a private economic research firm. “The numbers are miniscule.”