Several weeks ago, I posted a detailed overview of AB32 and Proposition 23 in anticipation of the approaching California Gubernatorial Election. With Election Day itself – November 2, 2010 – now just one day away, I am posting again with the hope of raising some last-minute awareness and increasing knowledge on one of the most controversial ballot propositions of the 2010 US gubernatorial elections: Proposition 23.
In my September post, I went into great detail about the specifics of AB32, California’s landmark “Global Warming Solutions Act”, and Proposition 23, a Texas oil company-led proposition to shelve the four-year old climate change legislation until unemployment levels in California drop down below 5.5%. I won’t rehash the information here, but to get acquainted with the issue, check out my related post entitled Climate Change Controversy in California: A Summary of California Climate Bill AB 32 and Ballot Proposition 23 (Part I of II).
While the above post focused largely on summarizing the details of the bill and proposition and putting the issue into the context of previous California environmental legislation, this post concentrates wholly on the effects of Proposition 23, which include effects on AB 32 and on the momentum and uncertainty of climate change legislation in the California and the United States. I should mention that a critical aspect of the debate on whether or not to suspend AB 32 is the economical impact, but I am not mentioning too much in regards to this here. Instead, this post remains focused on the effect of Prop 23 on greenhouse gas emission reductions, climate change policy momentum, and state and regional environmental initiatives.
Effects of Proposition 23 on AB 32 Measures
If the people of California vote tomorrow in favour of Proposition 23, measures mandated under AB 32 will feel the effects of this action most directly and most immediately. A number of discrete actions have already been initiated under AB32, and in some cases related action has been under development for four years already. Below is a sampling of AB32 measures that would be stalled by Prop 23.
Cap and Trade Program
In the realm of emissions trading, Prop 23 will suspend the cap and trade program currently being finalized by California Air Resources Board (CARB) regulations, a move that would have several negative implications. Perhaps most significantly, suspension of the proposed California cap and trade program would indirectly affect the development and implementation of the fledgling Western Climate Initiative (WCI) cap and trade program, with impacts on environmental policy and the economy of WCI partners.
Formed in 2007, the Western Climate Initiative is a “collaboration of independent jurisdictions working together to identify, evaluate, and implement policies to tackle climate change at a regional level”. The WCI operates independently from national governments, and its members are western states and provinces of the United States and Canada including Arizona, Oregon, Washington, British Columbia, Manitoba, Ontario, Quebec, and, most notably for this particular topic, California. One of the main goals of the WCI is to “design and implement a multi-jurisdictional market-based cap and trade system” among its members. The program would cover the six Kyoto greenhouse gases and major economic sectors including energy and transport, and would involve a two-phased introduction beginning January 1, 2012. The WCI focuses on developing a regional, rather than national, plan to reduce GHG emissions by 15% below 2005 levels by 2020. Upon complete implementation by 2015, it would cover almost 90% of GHG emissions in the WCI partner states and provinces.
California has been working closely with the WCI during the development of its own cap and trade program. The purpose of this working partnership was to design a program that would link easily with the state and provincial level programs of other WCI jurisdictions, and help to lower the overall costs of program implementation and administration. However, if Proposition 23 suspended California’s cap and trade program development, WCI cap and trade program momentum would slow considerably, and the regional cap and trade program would suffer from the lack of coordination with California. If the WCI cap and trade program is able to move forwards without support from California, another major problem exists: if AB 32 is still suspended when January 1, 2012 – the date for implementation of Phase 1 – rolls around, the pool of emissions covered by the program will be almost halved, since California represents about 40% of GHG emissions to be covered by the WCI program. Its absence from the WCI program would significantly impair the ability of the WCI to meet its emission reduction goals, and would reduce the effectiveness of the program due to the substantially smaller emissions trading market. Finally, any companies that took early action in anticipation of a California cap and trade program in order to reduce compliance costs would receive no credit for their investments and work.
In summary, the success of the WCI regional program depends heavily on California’s significant emissions market share and climate policy experience, and suspension of the state cap and trade program by Prop 23 would cut the legs out from under west coast emissions trading for the foreseeable future. Given that a common point against AB 32 is that it requires that California disproportionately invest in low carbon initiatives compared to fellow states, it needs to be pointed out that the impacts on the WCI cap and trade program brought about by AB 32 suspension would slow down momentum and progress in other states that are working towards sustainable economies.
Renewable Portfolio Standard
A Renewable Portfolio Standard (RPS) is a regulation requiring that renewable energy sources, such as wind, solar, and biomass, represent an increased proportion of energy production. In 2002, the California Renewable Portfolio Standard was created and requires that California energy companies must expand their renewable portfolio by 1% every year until 2010. Governor Schwarzenegger passed Executive Order S-14-08 in 2008, mandating an RPS of 33% by 2020 on top of the ‘20% by 2010’ requirement. Prop 23 jeopardizes the 33% RPS since Governor Schwarzenegger based his executive order on AB32 authority, and AB32 suspension could delay or, worse, invalidate, the 33% RPS. During the last couple of years, the existence of the 33% RPS has been pivotal in driving investment in the biofuels industry in California, an area of continued economic growth, even during the recession. Suspension of this mandate will likely result in investors and emerging companies seeking states with more aggressive RPS requirements.
Vehicle and Engine Efficiency
There are several measures related to vehicle and engine efficiency mandated by AB 32 that would be suspended by Prop 23. Regulations are currently being developed by CARB that dictate requirements for vehicle design and maintenance in hopes of reducing fuel and high-GWP gas use, and their associated GHG emissions. In addition, regulations have been proposed by CARB that would improve the efficiency of heavy-duty vehicles used for goods movement in California ports. Specific areas for research and development include advanced combustion technologies and waste-heat recovery. While the Clean Air Act, a piece of federal legislation enacted to control national air pollution, covers some area of goods movement, the CARB proposals are more comprehensive, detailed, and state-specific. Finally, AB 32 includes measures to reduce GHG emissions from transportation through retrofits to medium and heavy-duty trucks. The CARB scoping plan makes mention of reducing aerodynamic drag and rolling resistance as two areas for potential improvement.
Discrete Early Actions
The suspension of AB 32 would require that all nine of the CARB-mandated ‘discrete early action greenhouse gas emission measures’ be suspended indefinitely. These measures are directed at reducing GHG emissions from specifically targeted areas, including vehicles, landfills, and industrial processes, and are projected to achieve 12% of the overall emission reductions called for under AB 32 to meet the 2020 reductions target.
Four of the nine measures, including those targeted at perfluorocarbons (PFCs) produced by the semiconductor industry and sulphur hexafluoride (SF6) from non-electric and non-semiconductor applications, focused on reducing emissions from high global warming potential activities that are significantly more damaging, on a tonne-to-tonne of gas basis relative to CO2, to GHG emission levels. One of the measures is directed at increasing the capture of methane from landfills through various technologies. Landfills with methane capture technology are able to recycle heat produced through landfill activities and waste degradation into heat and power.
Perhaps the most significant early action, the establishment of a low carbon fuel standard to reduce the GHG intensity of transportation fuels by 10% by 2020, would also be suspended. This measure, required by Executive Order S-01-07, had the highest associated reduction capacity, with projections estimating reductions of 16 million metric tonnes CO2e by 2020. Under Prop 23, this measure would be suspended, and car manufacturers would be responsible for reducing emissions from their vehicles with no mandated requirements on the oil industry to improve fuels. Suspension of this measure would also affect the nascent biofuels industry, a significant area of economic growth in California, by removing requirements on the transportation industry to invest in low-carbon alternate fuel sources.
Combined heat and power (CHP), known also as cogeneration, is a process by which both electricity and thermal energy are simultaneously generated by a power plant. It is one of the most common forms of energy recycling. Every power plant creates and emits heat as a by-product during the generation of electricity. Cogeneration plants, however, capture a portion of this heat to be used for heating purposes, typically as hot water for district heating systems. The benefit of a cogeneration plant is that it reduces or eliminates the need to build new power plants, or expand current ones, since some heating requirements can be met through efficiently using heat that would otherwise be wasted.
The United States Department of Energy (DOE) proposed that CHP should comprise 20% of US generation capacity by 2030, but the bill left the specifics of implementation and enforcement up to individual states, meaning that many areas of the US have done little in regards to CHP plant promotion and investment. In response to this, “CARB plans to set a target of 4,000 MW of installed cogeneration capacity by 2020”. Prop 23 would suspend these measures, an action that would, in the long term, require investment by the state into existing or new electricity power plants that would be more wasteful and environmentally damaging than cogeneration plants.
Effects of Proposition 23 on Regulatory Certainty and Momentum
Aside from the suspension of AB 32 measures, Prop 23 would impact the momentum of California, and in some ways the United States, in regards to climate change policy and low-carbon fuel research and development. Policies directing environmental measures have been increasing in number over the past decade in California, and an indefinite suspension would cause a rolling stone to gather at least a little moss. The slew of measures under AB 32 have also significantly contributed to raising interest across the United States, most notably in the form of stimulating private investment.
As of now, California is top state in the race to be a national leader in clean energy and clean technology. Suspension of AB 32 and its myriad of low-carbon fuel and other measures requiring significant R&D into clean technologies would dramatically reduce innovation and investment in the clean energy and clean technology sectors of California, two of the few sectors able to maintain positive growth during the national recession. There are numerous impressive statistics available indicating the recent success and growth of these sectors in California, and their positive impacts on California economy and jobs. For example, since 2005, California ‘green’ jobs have grown in number ten times faster than the statewide average, and 500,000 employees currently work in clean tech or green jobs in California, according to a recent report from the California Employment Development Department. Further, in 2005, 1 year prior to the signing of AB32, California companies received 35% of the United States’’ clean technology venture capital. This has risen to 60% over the last 5 years, and is five times the investment of the closest competitor, Massachusetts. There are currently more than 12,000 clean tech companies in California (including 40 that have gone public), with 1,200 clean tech patents registered between 2002 and 2008.
This impressive growth would be heavily impeded by suspension of AB32. Indeed, the very prospect of suspension has already stopped investment into California. James Watson, the managing general partner of CMEA Capital, stated that his venture capital firm “literally stopped investing in [California] clean tech energy eight months ago due to this uncertainty”. This trend would only continue if AB 32 were to be suspended, and a statement released by the Green Chamber of Commerce suggested that California “risks a loss of more than $80 billion in Gross State Product and more than half a million jobs by 2020 if [the state] fails to implement this law as scheduled”. While it is difficult to predict the precise effects of Prop 23, it is safe to say that a large number of jobs within the clean tech and clean energy sectors would be in jeopardy.
It’s pretty widely agreed upon amongst economists that driving the unemployment rate below 5.5% could take a number of years, especially in the recovering economical climate, and that the time to achieve this is quite difficult to predict. The four years of investment and action already taking place under AB 32 would quiet fairly quickly during the inevitable period of uncertainty, and, perhaps more importantly, legal and regulatory confusion would be created without the direction of a centralizing plan. Without the CARB scoping plan to direct action, organizations and sectors would need to develop independent approaches to tackle any applicable regulations, and the expertise, time and headache required to sort all these out would lead to higher costs for some.
Another area of uncertainty related to Prop 23 is that the proposition doesn’t actually state a replacement deadline for the AB 32 mandated reduction target, so it’s assumed that it would remain as 2020. Given that, what happens if the unemployment rate achieves a level below 5.5% in, say, 2018? Would applicable regulations and targets still apply? There is a clause within AB 32 that states that the Governor can, during times of an economically unfavourable period, delay the target by a year. But what conditions would qualify to allow this delay? And would one year be enough? Certainly not for some companies, who may not have predicted the ‘un-suspension’, and wouldn’t have the capital to invest in the necessary technologies, research, or infrastructure to meet the requirements, a problem that would be especially serious for large-emitting, infrastructure-heavy sectors like the electric power industry. The need to acquire huge funding to achieve mandated reductions and investments on such short notice could translate into sudden, unexpected spikes in energy costs. This feeling of uncertainty would impact a range of players, including businesses, investors, and state and local governments.
The suspension of AB 32 could impact a few other areas as well. The CARB scoping plan has some guidance related to educational programs that facilitate the transition to a low-carbon economy by raising awareness. Finally, as mentioned earlier, suspension of AB 32 would also lead to a loss of momentum for some regional initiatives, such as the WCI cap and trade program.
To Sum it Up
So folks, to sum it all up: California would still be able to make progress on some environmentally focused state measures and initiatives if AB 32 is suspended tomorrow. However, I think that the removal of AB 32 as a comprehensive coordination centre for these efforts would ultimately reduce the effectiveness of the remaining measures while at the same time most likely increasing long-term costs to the state. Right now, California is the most influential juggernaut for leadership on climate change in the United States. While some Californians will undoubtedly – and understandably – feel that the costs of leadership shouldn’t have to fall on their state, California already has an impressive number of measures, mandates and man-power in place to continue to do just that: lead.