Nichols: CARB’s AB 32 Long Term Scoping Plan Approved—Carbon Markets Await Signals

Mary Nichols

Recent months have been full of game-changing political and economic events. But perhaps none of the legislative decisions regarding climate change and the reduction of carbon emissions will have a larger impact on the way the economy functions in the United States than the AB 32 Scoping Plan recently approved by the California Air Resources Board. In order to get the details on the development and implementation of the Scoping Plan, VerdeXchange News spoke to CARB Chair Mary Nichols, who, in the following interview, describes the comprehensive scope of California’s landmark plan. 


VerdeX: In December, the California Air Resources Board approved what many have termed a landmark state climate action plan—the AB 32 Scoping Plan. What should state business leaders, clean and green technology entrepreneurs, public officials, and environmental stewards pay closest attention to regarding the Scoping Plan?

Mary Nichols: The most important thing about the Scoping Plan is that it lays out clearly, with numbers and with a fair amount to detail, a mixed plan for achieving a real reduction in greenhouse gas emissions—about 30 percent by the year 2020. It’s a do-able plan that clearly indicates what the assumptions are behind it and what the mechanisms will be for carrying it out. The plan is just a plan. It’s not all of the regulations and programs that will achieve the results. But it’s the first time that any state has created a comprehensive plan that touches all sectors of the economy, including land use, transportation, and businesses, in a way that can be seen by everybody and judged as to whether it is fair, whether it’s effective, and whether it meets the tests of cost effectiveness and promoting green technologies. With all of the objectives of AB 32, we think we hit the mark, but now is the time to actually start to make it happen. 

VerdeX: Many people believe that what government does best is sending marketplace signals—by adopting policies that either incent or disincent behavior. What signals has CARB sent with it’s adoption of the AB 32 Scoping Plan?

Nichols: There are a couple of important signals that we’ve sent. Probably the biggest headline is that we committed to a cap-and-trade program that will cover about 85 percent of all sources of emissions in California. It will be a very large, economy-wide cap-and-trade program. We did not spell out all of the details about how the program will operate, but we clearly expressed a couple of positions that are relevant: one being a preference for an auction and to go to a 100 percent auction as quickly as we can feasibly do it, another being a willingness to entertain offsets as a means of compliance for companies that are subject to the cap and we will not set a geographical limit on where those offsets come from. We will be rigorous—people know that about California—in making sure that the offsets are real, verifiable, enforceable, permanent, etc., but we will not insist that they only be local or even within the United States. 

VerdeX: Has CARB studied Europe’s experience with cap and trade?

Nichols: We followed the process in the EU very closely. We have had a member of the U.K. government working on the details for the past year. We have had people in Europe; we’ve had people visiting us. We have been concerned from the beginning about the issue of over-allocation, which is now widely recognized. One of the most important lessons in the European experience was that because they gave away the allowances in the beginning—and gave every country what they said they should have on the honor system—there was an immediate impact in terms of increases in prices of energy and a very visible and politically unacceptable transfer of wealth into certain sectors of the economy, mainly the energy sector.

Many people have used that fact as an argument to try to discredit the entire market-based program. My response to that has generally been that anytime you have money involved you have the potential for fraud. If there isn’t money involved, there is no reason for anyone to try and commit fraud. We tend to assume that all regulations are enforced perfectly, even though when we do audits we know perfectly well that they are not. Direct regulations have a standard rate of violation. We do our best to keep that as low as possible through vigorous enforcement and by assigning big penalties to people when they violate. In a market-based system, where money is the metric and where you find people in violation, you have to similarly fine them big amounts of money and make it painful. Without that kind of enforcement, the program won’t work. The fact that the fraud occurs is an indication that there is something real at stake. It’s actually a healthy sign.

VerdeX: Our sister publication, the Metro Investment Report, interviewed you in June 2008 about the concerns of municipal utilities, e.g., LA DWP, regarding cap and trade for California. LA DWP General Manager David Nahai said, “cap and trade in this state is potentially a massive wealth transfer from the public utilities to the investor-owned utilities.” How might cap and trade work to the advantage of both investor-owned and municipal utilities in the state of California?

Nichols: The language in the Scoping Plan and the adopting resolution was crafted about as carefully as any legal document that I’ve ever been involved with to make it clear that we are aware of the potential problems and will devise the rules in a way that will not disadvantage either category of utility or geographical area of the state simply because of where they are today. That doesn’t mean that the utility that has relatively high carbon intensity isn’t going to have to do more than one with lower carbon intensity. They will have to spend the money, and they will have to do more to dilute their carbon profile by spending more to achieve energy efficiency in their systems and to increase the amount of renewables. But the issue that leads to a perception of unfairness is if one utility actually has to pay another in order to get those kinds of reductions. One of the challenges of the entire cap-and-trade program—translating it from concept to reality—is that the largest businesses, by and large, do not want to be in the business of having to buy credits. They are willing to pay for their allowances from the central bank (the auction), but they are not interested in having to deal directly with others and that’s something we are going to have to take into account when we actually turn this into a working program.

VerdeX: How California achieves its 2020 goals is critically important to whether the state is able to exceed 2020 goals. If the state simply goes back to 1990 targets and achieves 30 percent GHG reductions, it may create a benchmark that makes it impossible to reaching more challenging goals. How will CARB’s Scoping Plan ensure that the state build a platform that allows California to continue to transform it’s energy and transportation economy?

Nichols: I’m not interested in using this plan as a way to play a counting game. The goal is to achieve a real transformation in our energy economy and a transformation in our transportation system. We’ve tried to lay out a longer term vision, as opposed to just asking people to meet a certain number in any given year. We are well aware of the fact that there is more to learn about potential technologies, and even all of the emissions that we are going to need to cope with. We have a very good baseline. We know what many industries are emitting, but we are still learning about, for example, what the actual emissions from our urban sector are. So, this is a work in progress. The law says that we have to update the plan every five years, and in the mean time we can still change what we are doing.

VerdeX: Leading up to CARB’s adoption of its Scoping Plan, there was much discussion about the plan’s impact on the economy and business’s concerns about whether it actually will encourage job growth and economic development or further hurt what already looks like a deep recession in the United States and California. Will implementation of AB 32, in your opinion, be good for the economy of California?

Nichols: The first thing I always hear from businesses is that they want as much long term certainty and predictability as possible. The plan gives people a substantial degree of certainty about where we are headed at the state level with our greenhouse gas program. To that extent, it should be very helpful to those that are planning for a future here in California. By including the mix that we have assembled of direct source regulations and market-based programs, such as the cap-and-trade program, we have indicated that we are not aiming this plan at only one group of entrepreneurs or simply creating a market so that people can make money in trading emissions. We understand that we have many important businesses in our state that want to continue to do business here and that we want to keep here, including in our electricity sector. But we are constantly changing and growing, and we need to leave room. One of the problems with some of our past pollution control programs is that they focused only on tightening controls on newcomers and not on grandfathered, existing sources. Another hit on our current pollution control programs is that they are too narrowly focused on just reading the numbers and not on making more fundamental changes that would make our whole economy greener for the long run. This plan, I believe, avoids those errors of the past and lays out a path toward a really transformational approach to squeeze the carbon out of our economy while growing it at the same time. It’s very much orientated toward creating incentives for new businesses that will bring new jobs and new technologies that will help solve our problems. It’s a very optimistic plan, and other states and countries around the world are seeing it that way.

VerdeX: As we do this interview, the CPUC is reviewing an important transmission corridor decision (the Sunrise Powerlink). Clearly, transmission is one of the roadblocks to realizing the potential of renewables. What is CARB’s viewpoint on the transmission issue, and has it shared it’s views with the CPUC?

Nichols: We don’t speak to the siting or the amount of new transmission that is going to be needed as part of our Scoping Plan, but we’re certainly in frequent communication with our sister agencies that are involved in energy planning. In fact, we meet on a quarterly basis at the chair, director, or president level to talk about some of these big pictures issues. Transmission has been on the table from the very beginning as something that was going to be a necessary part of the program.

It’s well known that you can’t get renewables into the places where they are needed without changes in the current transmission system. There are roadblocks—financial roadblocks, siting roadblocks, land ownership roadblocks, and neighborhood opposition roadblocks—to almost any proposed transmission line. Even where you’re paralleling an existing transmission line, there still will be people who are concerned about wind patterns. The military and civilization aviation have raised roadblocks to the Tehachapi Line upgrade, which looked like an absolute slam-dunk when it first was proposed. Then you contrast that with trying to locate a completely new line in an area where there hasn’t been one before and you realize how difficult this is to do.

One of the things that the Obama Administration is going to have to do is work with the states on transmission. FERC is actually going to have to come out of its shell and be a player, working with the Department of Interior, the federal land management agencies, and the states, to push though some new transmission lines. And it can’t all be about sticks; it has to include some carrots as well. It’s going to be an exciting time for some of these agencies.

VerdeX: On issues of land use, CARB’s Scoping Plans defers to SB 375, Senate President Pro-tem Darrell Steinberg’s legislation. How are CARB and AB 32 interfacing with the Legislature on the development of SB 375 to ensure that SB 375 is adequate to the task of reducing emissions from land use and transportation planning?

Nichols: The first step is to appoint the Regional Target Advisory Committee (RTAC) that’s called for in SB 375. The Air Resources Board is going to be making those appointments at our January meeting. I’ve seen the list of potential members evolving over the last month or two since the bill was first signed. If it weren’t illegal, I could be auctioning off seats on that commission and we could probably fund the budget gap. But since we can’t do that, I just have to tell you that competition is intense, and we’re hoping to put together a team of people who are individually experts in this area, who also broadly represent the interests of cities, developers, and environmentalists, and who can come up with a set of criteria that we can use to set feasible targets. There is a lot of new literature emerging in this area, and while this is not an academic exercise that we’re engaged in, it is important that we all be up to speed on what’s known out there about what can be achieved through the means that might be considered. The first step is going to be to bring everybody up to speed.

VerdeX: Lastly, on January 26th, you are keynoting the VerdeXchange Conference in Los Angeles, a one day, substantive networking conference that includes global, federal, state, and regional market leaders in energy, transportation, water, and clean and green technology. One of the central questions of the VerdeXchange Conference is, What are the contributions California can make to informing and instructing the federal efforts regarding climate change after January 20, 2009?

Nichols: California’s leadership, which I was delighted to hear the president-elect acknowledge when he introduced his new climate team, has been our willingness to take some of the big goals and translate them into real, practical solutions. We’ve done that in the area of auto emissions with the Pavley Standards, which we will begin to implement next year. We’ve done it with the Low Carbon Fuel Standard, which is emerging but is going to be put into place also in 2009.

In the Scoping Plan as a whole, I think, we’ve taken a very pragmatic approach to assessing where we can achieve reductions, and looking at all of the different criteria that we want to apply to the plan to really make it a success in a lasting way. If you’re only interest was how to get the tons as cheaply as possible, or your only interest was in how to get the tons in ways that benefited low income constituencies, or your only interest was in doing this as fast as possible, or backing out all petroleum, there are may different criteria that could have given you a different plan. What we tried to do was to create a plan that optimized all of those goals simultaneously, as best we could.

What makes me feel the most hopeful about its lasting benefit is that at the time that we did adopt it, every major stakeholder group, even those who are the most apprehensive and most concerned said, “This is a good plan. We want to work on details, but let’s go forward on the plan.” So it has that solid foundation of having been done in an inclusive and open process that laid out the thinking that went into it. We’ve kept that broad coalition of people that supported AB 32 and are willing to keep working with us together to bring it into reality. •••