California Climate Law Details to Get Grand Unveiling

Answers to key questions about state's cap and trade and energy efficiency programs to come out of separate meetings tomorrow

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As politicians around the nation become increasingly hesitant about taking action against global warming, California is pushing ahead this week with two much-awaited steps that will have broad implications for climate policies at home and elsewhere.

The decisions by state regulators in separate meetings Thursday amount to the grand unveiling of California’s climate strategy after years of debate and exhaustive policy-crunching.

The Air Resources Board is scheduled to answer the central question of the state’s previously announced cap-and-trade emissions program – whether the largest polluting industries are to be given emissions credits for free, whether they must buy them at auction, or some combination of the two.

The Public Utilities Commission will decide whether to grant large subsidies to the state’s utility companies for cutting their customers’ energy use even though those savings appear to have been far less than projected.

The details of these two decisions will have enormous impact, especially because many other states and foreign governments are modeling their climate policies on California’s. Critics say that both decisions will determine whether these policies have enough teeth or are weakened by needless giveaways to large corporations.

Energy Efficiency Gains Less Than Expected

In many ways, what’s at stake can be seen in the compact florescent light bulb. For years, California pioneered the promotion of energy-saving CFLs. The state’s landmark climate legislation in 2006, known as AB 32, created huge subsidies for CFLs, funded by a ratepayer surcharge. Yet a study released earlier this year by the Public Utilities Commission found that the subsidies, which totaled $265 million between 2006-08, were surprisingly ineffective even though the number of CFLs rose faster than expected.

The subsidies only resulted in 25 percent of the predicted level of energy savings. Other energy-efficiency programs, which spent another $1.8 billion during the same period, failed similarly. Ultra-efficient air conditioners and appliances were installed, air ducts were sealed and other worthy programs did their work, but energy use dropped by much less than had been predicted.

Last month, the PUC’s embarrassment was doubled when its own Division of Ratepayer Advocates called for the PUC to cancel bonus payments of as much as $221 million allotted to the utility companies.

These payments, through a plan known as “shared savings,” are the new cornerstone of the PUC’s “decoupling” policy. Under this system, utilities’ profits are based on the cost of providing service rather than the amount of electricity and natural gas sold to consumers. The payments for shared savings were intended to provide an additional incentive for utilities to ignore the previous formula of “more energy consumption = greater profits.”

“The shared savings program is not delivering what was promised,” said Cheryl Cox, policy adviser for the Division of Ratepayer Advocates. “It’s pretending that everything is OK, and it’s creating the illusion of success.”

This turnaround on energy efficiency is a bitter pill to swallow for many climate policy experts. For years, energy efficiency has received less political attention than the flashier, more ostensibly profitable sectors such as solar and wind energy. Yet numerous studies have shown that efficiency programs can bring more bang per buck than subsidies for renewable energy. California’s programs of decoupling and shared savings have been held up worldwide as a prime example of best practices, and government officials from Canada to China are planning to adopt them full-scale.

“The results of [Thursday’s] decision will have a huge impact on our understanding of what can be accomplished through energy efficiency,” said Peter Miller, a staff attorney with the Natural Resources Defense Council.

The NRDC is supporting the utility companies’ position that the shared savings subsidies should be paid for the program’s first three-year period despite the poor results. This position is echoed by PUC President Michael Peevey, a former president of Southern California Gas & Electric Co., who argues that the end — getting the utilities on board with the new program — justifies the means.

“If the utilities are subject to substantially reduced incentives or penalties based on factors they could not be reasonably expected to anticipate or respond to, they will have little reason to embrace energy efficiency as a core part of their business models,” Peevey wrote in his proposal to fellow commissioners.

The NRDC and some other environmentalists worry about the broader domino effect.

“If these programs are achieving only a fraction of what we thought they were, then there will be impacts on AB 32’s strategy and on programs across the country and around the world,” Miller said. “California is seen as the leader worldwide on energy efficiency, and utilities in China have just adopted an energy efficiency standard that in many ways is modeled on California’s program.”

Final Step on Emissions Trading System

While the PUC commissioners cast their votes in San Francisco on Thursday, the Air Resources Board members will be meeting 90 miles away in Sacramento. They will be doing what the U.S. Congress couldn’t — enacting an emissions trading system. California’s system was authorized by AB 32, and legislators and the Air Resources Board have been gradually laying the foundations for Thursday’s final step.

In the November election, state voters chose to continue, not abort, this new system when they defeated Proposition 23, which was funded by major Texas oil companies. Starting in 2012, the state will impose an emissions cap on the state’s largest polluters, including power generators, cement kilns, oil refineries and petrochemical plants, and will gradually lower the limit.

The Air Resources Board will decide whether to offer the emissions permits for free, auction them, or some combination of the two. The revenues generated from the sale of the emissions permits could reach as much as $7.5 billion in the first year of the program.

An advisory commission appointed by the Air Resources Board recommended auctioning most of the allowances and returning 75 percent of the revenues to households in tax credits or an annual dividend, much like the Alaska Permanent Fund that is derived from oil production royalties in the state. The commission recommended using the remaining quarter for “strategic purposes” such as helping low-income communities adapt to climate change.

Most observers expect the board to take a more business-friendly approach, providing part of the credits for free to give firms time to adjust. That approach appears to resonate with most Californian voters. According to a recent Field Poll commissioned by Next 10, a research group, 52 percent of those surveyed favor giving away allowances to businesses for free.

For some critics, this is too much. Marcel Hawiger, a staff attorney at The Utility Reform Network, a pro-ratepayers group, said it amounts to a political decision: “The message to the utilities is, ‘We have to give you more money because the primary purpose is to make Wall Street happy about emissions reduction.’”

No matter how generous or inefficient the subsidies, California’s cap-and-trade system could be expanded gradually into a North American carbon market. It may be joined by New Mexico and the Canadian provinces of British Columbia, Ontario and Quebec, which also have cap-and- trade laws. Links to the Regional Greenhouse Gas Initiative, a trading program covering 10 states in the Northeast, are also being explored.

Yet the new template is vulnerable. In November, California voters not only passed Prop. 23 to support the state’s clean energy laws but also passed a contradictory measure, Prop. 26, which created severe restrictions on any state revenue-generating measures. Conservatives are expected to challenge the new cap-and-trade system in court, saying it contradicts Prop. 26. These cases and appeals are expected to last well into 2012 — if not beyond.

Photo: Rich Niewiroski Jr.

See Also

Battle Over California Climate Law Will Have National Ripple Effect

Cap-and-Trade, California Style: Who Gets the Money?

California Defends Climate Law, Remains National Bastion of Clean Energy Economy

Energy-Efficiency Strategy Could Cut Household Bills by $450 a Year