Leakage. It sounds like something dribbling from a broken beer stein. It’s also become a buzzword in the implementation of the California Global Warming Solutions Act of 2006, also known as AB 32.
The California Air Resources Board defines leakage in bureaucratese as “a reduction in emissions of greenhouse gases within the state that is offset by an increase in emissions of greenhouse gases outside the state.” In other words, some California businesses will be shutting down, downsizing or moving out of state in response to the legislation’s exorbitant costs and onerous regulations.
Leakage might be more accurately called “floodage.” California will have 262,000 fewer jobs in 2020 than if AB 32 had not been enacted, predicts a study by Andrew Chang & Company. The state could lose as many as 51,000 jobs due to refinery closures alone, warns a study by The Boston Consulting Group.
As a result, “AB 32 requires ARB to design measures to minimize leakage to the extent feasible,” according to CARB. So, at the same time that state government is bashing businesses with a bureaucratic sledgehammer, it’s offering carrots to entice them to stick around a while, if only to receive more cudgeling in the future.
The first sledgehammer blow will be felt on Nov. 14 with the first cap-and-trade auction for allowances, which permits businesses to emit greenhouse gases. About 350 businesses emitting at least 25,000 metric tons of carbon dioxide equivalent are targeted. They include oil producers, refiners and electricity generators.
The carrots are the 90 percent of allowances that initially will be dispensed for free. One allowance is equivalent to one metric ton of CO2. Over time, businesses will be squeezed as the cap on emissions is lowered and the number of free allowances is reduced, thereby driving up the cost of complying.
“Leakage” was on just about everyone’s lips at the Sept. 20 CARB meeting, particularly from the scores of business owners, union workers and minority advocates who pleaded with the board to halt cap-and-trade. Many of them cited the Legislative Analyst Office’s finding in an Aug. 17 letter to Assemblyman Henry Perea, D-Fresno, that an allowance auction is not necessary to meet the AB 32 goal of reducing greenhouse gas emission levels to 1990 levels by 2020.
“A key advantage of 100 percent free allocation is that it would significantly offset more of the marginal cost increase resulting from compliance with the program as compared with the Air Resources Board approach and reduce the potential for leakage while preserving the environmental integrity of the program,” the LAO letter states.
On the other hand, a disadvantage of handing out free allowances is that it disguises the cost of complying with the emission reduction mandate.
“[W]hen allowances are introduced through a competitive auction, the market price of allowances indicates the marginal costs that firms bear to reduce GHG emissions,” the letter states. “Price discovery can be especially important when a program (such as cap-and-trade) is in its infancy.”
Another disadvantage of providing free allocations, as far as state officials are concerned, is that the auction is expected to raise anywhere from $660 million to $3 billion, creating a slush fund to dole out money to pet energy projects and favored constituencies.
Union, minority opposition
It’s been natural for business owners and trade associations to lead the opposition to AB 32; so it was noteworthy when 10 United Steel Workers who work for Phillips Petroleum spoke out while wearing “Save Our Jobs” t-shirts.
“The media talk about unions and companies fighting. We are not fighting on this issue; we are in accord,” said Lisa Bowman. “California has a strong tradition of demonstrating that a healthy environment and strong economy can work hand in hand.”
One of her coworkers said that they are concerned that the crackdown on California refineries means “that out-of-state refiners will have an unfair advantage. California refineries need the regulatory certainty that investing in updates is in their long-term interest. Make sure a level playing field is provided.”
Also noteworthy was the opposition from minority advocates, despite the fact that a chunk of the green slush fund is slated for “disadvantaged” communities.
“We will see a significant business flight and job loss, declining revenues and further erosion of the social safety net,” said Andrew Barrera, representing the Los Angeles Metropolitan Hispanic Chambers of Commerce. “Cap-and-trade will likely impair the profitability and sustainability of the small local businesses. In Los Angeles we are feeling the effects of AB 32. It will substantially increase energy costs. Los Angeles water and power rates have continued to go up. In the past few weeks the department has asked for another 11 percent increase. We cannot afford another emission allowance tax on top of that. Without free allowances we are likely to lose companies to other states. We are having trouble understanding why we would even consider this in today’s bad economy.”
Henry Casas, representing Soledad Enrichment Action, which educates and trains at-risk youth in the Los Angeles area, is concerned that increased business costs will result in fewer job internships, reduced financial assistance and training opportunities. “Unemployment and dropout rates in our communities are already alarmingly high,” he said. “This will make them worse.”
Said James Brady, representing 100 Black Men of America and noting that African-American unemployment is almost 19 percent, “Cap-and-trade auctions will drive energy costs up by billions of dollars, forcing many businesses to downsize or leave the state. We don’t need an auction to reduce greenhouse gas emissions.”
Nichols defends cap-and-trade
The cap-and-trade discussion lasted for more than four hours, but it essentially was over after five minutes. That’s about how long it took CARB Chairwoman Mary Nichols to defend AB 32, cap-and-trade and the allowance auction process.
“We are clearly on track to meet the goal to get to 1990 emissions by 2020, then getting to a reduction of about 80 percent over business as usual by 2050,” said Nichols. “While nothing about this program has been uncontroversial, there was an initiative in 2010 [Proposition 23]. Although the recession at that point was in its depths, the measure was rejected overwhelmingly by the voters. Everybody is against air pollution, but they just don’t happen to like the particular regulation that affects them. I think that’s where we are with respect to global warming.
“Cap-and-trade is the most novel and controversial piece of the program. Other than electric utilities, which are subject to a different regulatory scheme, there is no requirement that businesses participate in the auction. Companies subject to the rule will get allowances that cover about 90 percent of the greenhouse gases they are currently emitting for the first years of the program. As time goes on those who have cleaned up their emissions will get extra allowances that they can sell. Others will have to purchase or get offsets from others.
“I think that some form of an auction has been shown to be the most efficient and equitable way to create public information as to what the actual value of what a ton of carbon is. We have gone a long way to making these regulations as simple and palatable as possible. We will keep working to improve them.”
After the public had weighed in, the board members were relieved that they had not been given a harder time. “This hearing is quite a bit different than I expected; it’s far more peaceful,” said Board Member Ron Roberts. “I think we have made significant progress. I’m largely satisfied with where we are.”
Nichols said it’s still possible that the Nov. 14 auction could be postponed if significant problems arise. But at this point it looks like: Damn the leakage, CARB is moving full speed ahead with California’s quixotic effort to save the planet from global warming.
(Dave Roberts is a political commentator and contributes to CalWatchdog. Originally posted on CalWatchdog.)