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California cap-and-trade: A political gamble?

January 11, 2010 |  5:23 pm

It may be no accident that an advisory committee to the California Air Resources Board today recommended that 75% of an expected $20 billion in annual revenue from the state's proposed global warming measures be kicked right back to state residents.

"Household friendly" is the way the announcement put it.

The 16-member Economic and Allocation Advisory Committee is made up of distinguished economists and environmental policymakers such as Stanford's Lawrence Goulder and Berkeley's Dan Kammen, but they can put their fingers to the wind as much as anyone.

"I continue to believe the best program will be one that returns value to the people through tax cuts, rebates or dividends, and I applaud the committee for recognizing those options," said Gov. Arnold Schwarzenegger in a statement after the vote.

Goulder told reporters that "Political feasibility was not a criterion we employed." But with a 12.5% unemployment rate, California's landmark AB 32 climate legislation faces major challenges as the air board prepares a complex program to cap the state's greenhouse gas pollution by 2012, auction emissions allowances to industry and design a trading program to alleviate the burden.

Industry has mounted a vigorous campaign against the program, citing a study that pegs the cost to  households at $3,857 a year in higher energy prices -- a figure that the air board flatly disputes. Other studies estimate the rise in energy costs at about 1.3% per household. The advisory committee is now reviewing the air board's economic analysis and will issue a report on the costs next month.

Polls show a drop in California residents' concern over global warming. A Republican legislator is gathering signatures for a ballot initiative to roll back the law until state unemployment drops to 5.5%. And leading GOP gubernatorial candidate Meg Whitman has also called for a delay in implementing the rules.

The advisory committee's report calls for auctioning 100% of greenhouse gas emissions permits for industry, a program that is expected to generate as much as $20 billion a year by 2020. The system would gradually lower the cap so less pollution would be emitted, and it would allow industries to trade permits among themselves to save money. 

Despite heavy lobbying from California utilities, the committee specifically recommended against offering free allowances for them to reduce electricity prices, "which would remove the incentive for consumers to invest in energy efficiency," it said.

A cap-and-trade system with 100% auctioned permits is already operating in nine Northeastern states covering only power plants and has raised $500 million in the first 15 months. Europe's cap-and-trade program suffered major problems after giving away allowances to industry, which removed incentives to conserve fossil fuels. Now the European Union is phasing in an auction system expected to generate $71 billion a year by 2020.

The California program, as recommended by the board, would allocate a quarter of the revenue to projects such as renewable-energy plants that would reduce greenhouse gas emissions. And it would offer special breaks to low-income families who might suffer from higher energy prices. It also opens the way for "border adjustments" for industries such as cement, which could lose business to out-of-state producers that are not subject to carbon regulation.

-- Margot Roosevelt

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