Three new comment letters on California climate policy

Yesterday Michael Wara and I submitted a pair of comment letters to CARB regarding its proposal to extend the cap-and-trade system beyond 2020. We split our comments into a letter that addresses CARB's legal authority to develop this regulation and a set of substantive policy considerations regarding the proposal's details. Unfortunately, our view is that CARB likely lacks the necessary authority to act because the authorizing statute (AB 32) only provides this authority through 2020. On the policy side, CARB has also made a number of assumptions regarding the stringency of the post-2020 caps that may frustrate California's ability to reach its 2030 target by placing an overly aggressive share of the burden on difficult to regulate "uncapped" sectors. CARB will discuss its proposal at a Board Meeting this Thursday in Sacramento. 

Today I finished up a related comment letter to the California Independent System Operator (CAISO). CAISO is proposing to expand its wholesale electricity market to include some of California's neighbors. The proposal implicitly assumes that California maintain a post-2020 price on carbon, without which a wholesale market cannot distinguish between high- and low-GHG resources. Because the future of California's approach to carbon pricing is very much up in the air at the moment, I revisit the concerns expressed in the legal comment letter Michael and I sent to CARB. My comment letter to CAISO also addresses the need for additional detail on the precise market design details since the legal and net GHG implications of CAISO regionalization will depend on these parameters. 

Let's just say it's been a busy week in state climate policy.

Media: post-2020 California climate policy (ClimateWire)

Debra Kahn quotes me in today's lead story in ClimateWire on the passage of SB 32, the August carbon market auction results, and the future of state climate policy in California. 

CALIFORNIA: State Assembly approves bill to extend climate targets
Debra Kahn, E&E reporter (August 24, 2016):

While S.B. 32 doesn't explicitly deal with cap and trade, it does provide more support for the state's other ongoing climate activities, observers said. Based on the authority of an executive order from Brown last year, ARB is already writing regulations to reach the 2030 target, partly by continuing existing programs and partly by establishing new limits on methane, black carbon and other "short-lived" climate pollutants (ClimateWire, Jan. 11).

"It does give us a 2030 target, and if we look at what CARB has been doing with the scoping plan process, to my reading it didn't look as serious as it might because it wasn't clear what the legal authority post 2020 would be," said Danny Cullenward, a research associate at the Carnegie Institution for Science.

As the story notes, SB 32's statewide 2030 emissions target is conditional on the California Legislature also passing a companion bill, AB 197, before the end of this month's session. UCLA's Ann Carlson has more on the connection over at Legal Planet

Washington's proposed Clean Air Rule

In an earlier post, I provided some background on climate policy developments in the State of Washington, where the Department of Ecology withdrew a proposed cap-and-trade regulation in February and promised a revision over the summer. As expected, the Department then issued a proposed Clean Air Rule in late May and provided an opportunity for public comment. 

Consistent with the Department's earlier thinking on climate policy, the proposed rule contemplates a significant role for in-state compliance via allowances from external emissions trading markets. While the new proposal doesn't mention other linked markets by name, it would set up a process whereby the Department of Ecology could approve external emission trading markets' allowances for compliance with the Clean Air Rule. The accompanying cost-benefit analysis makes clear that one of the Department's compliance scenarios assumes that allowances could be purchased from the California-Québec market, which is currently oversupplied

Based on the concerns outlined in my earlier post, I wrote a short comment letter addressing the environmental risks associated with enabling in-state emitters in Washington to comply with the proposed rule by purchasing allowances from California's oversupplied carbon market.

That said, the proposed link to California isn't the only problem with this rule. It also contemplates broad use of voluntary carbon offset protocols as well as renewable energy certificates (RECs), both of which set a low bar for compliance standards. Since other stakeholders are already concerned about these issues, however, I decided to focus on recent developments in California's market—most of which are poorly understood outside of California and in any case occurred after the Department of Ecology put out its proposed rule.

At the same time, there's an important connection between voluntary offsets, RECs, and my concerns with linking to oversupplied markets. In many ways, the excess permits available from an oversupplied system are analogous to low-quality carbon offsets: when a regulator allows a company to purchase an oversupplied market's allowance (or a low-quality offset), that purchase doesn't cause net emissions to fall on a one-for-one basis. In the case of a low-quality carbon offset, the lack of environmental quality means that the "real" emission reductions are less than the face value of the credit because the offset rules are too lax; in the case of an oversupplied market, the "real" emission reduction is less than the face value of the allowance because market demand is too lax relative to supply. In both cases, in-state emitters hold an instrument that allows them to emit more at home because the instrument counts as a reduction abroad; and in both cases that reduction abroad isn't worth 100% of its stated value. 

Washington's proposed Clean Air Rule offers a useful reminder of the institutional constraints on market-based climate policy. Economic intuition suggests that the more compliance options are available—and the greater their geographic scope—the lower overall compliance costs will be. But the governance challenges can be enormous. 

As my colleague Michael Wara pointed out in his own comment (no link available), the proposed rule would either enable a high volume of low quality offsets or require the Department of Ecology to become an offsets regulator, hiring full time staff and vetting technically complex offset protocols. Similarly, if the state wants to make sure that the use of RECs is robust and additional, it will need to track RECs markets across the western U.S.

My point is that linking carbon markets raises similar challenges, as I've argued elsewhere. One has to monitor the integrity of linked markets in order to be confident that the full range of compliance instruments is equivalent to in-state reductions. If that task can be done well and cheaply, it's a great idea. But if a regulator lacks the capacity, budget, or will to perform these duties on ongoing basis, then perhaps the risks of linking are greater than the benefits

Media: Post-2020 cap-and-trade in California (ClimateWire)

Thanks to E&E reporter Debra Kahn for featuring me in two great stories on the California Air Resources Board's draft proposal to extend cap-and-trade beyond its current expiration at the end of 2020. E&E's wire services are the best way to follow key developments in state and federal energy and climate policy.

CALIFORNIA: Under pressure, state to propose cap-and-trade changes
Debra Kahn (July 11, 2016):

Observers say the California Air Resources Board's (ARB) proposal to "revise the requirements for unsold allowances and vintages available in the current auction" could increase demand for copious supplies that are currently causing low demand at state-run auctions (ClimateWire, May 27). One way to increase demand for the allowances could be to allow them to be used in the post-2020 trading period.

"The solution to pollution is dilution," said Danny Cullenward, a research associate at the Carnegie Institution for Science. However, he said, tweaking market rules could hurt perceptions of the program's environmental integrity. "If pre-2020 allowances can be used after 2020, we'd be solving the short-term oversupply problem at the expense of post-2020 market integrity."

CALIFORNIA: State releases plan to extend cap and trade through 2050
Debra Kahn (July 14, 2016):

"If you believe this system is credible, you should buy allowances at today's low prices and hold them for the post-2020 period," said Danny Cullenward, a research associate at the Carnegie Institution for Science who questions ARB's post-2020 legal footing. "Otherwise, you'll have to buy them back at a much higher price later."

Cullenward pointed out that legal questions about the program's post-2020 status should also apply to ARB's submission to U.S. EPA. If cap and trade is not legal, then EPA should not accept it as a compliance plan, he said, even if California's emissions are projected to be well below the federal cap for 2030.

"With this legal uncertainty in the state, it'll be an interesting question to say to the federal government, 'Don't worry about that; we've got that taken care of,'" he said.

New paper on California's carbon market

Andy Coghlan and I have a new article out in The Electricity Journal on recent developments in California's carbon market. In the quarterly auction this past May, 90% of allowances failed to find buyers. As a result, the joint California-Québec auction failed to collect over $880M, $550M of which was due to be delivered to California's greenhouse gas reduction fund (GGRF).

There will be significant consequences if Q3 (Aug) and Q4 (Nov) auctions follow the pattern observed in Q1 (Feb) and Q2 (May). As Andy and I discuss in our piece, the fundamental drivers of the May auction results include persistent market design issues and a lack of current legal authority to extend the market after 2020. This suggests that the market's problems are unlikely to be resolved anytime soon. 

Given the importance of carbon market revenue to the political economy of California's climate policy, Andy and I hope that readers will find our article a useful resource for putting the May auction in context. Thanks to the journal's editor, Rich Cohen, for expediting its publication. 

Aliso Canyon comment letter

Mike Mastrandrea, Emily Grubert, Aaron Strong, and I just submitted a comment letter to CARB regarding its use of 20-year GWPs as discussed in the post below.

Whether CARB continues to use 20-year GWPs in the final methane leak mitigation plan, does so in the final short-lived climate pollutant (SLCP) reduction strategy, or simply has to reconcile different GWP time horizons in its 2030 scoping plan, these technical issues we identify are likely to become more important in the coming months. I look forward to working with CARB and other interested stakeholders to make that policy decisions are informed by the best available science. 

Thanks to Barbara Haya, who provided some helpful pointers to the use of GWPs in California's compliance-grade carbon offset protocols. 

Mitigating Aliso Canyon / Porter Ranch methane emissions

The California Air Resources Board (CARB) released a draft mitigation program for the Aliso Canyon (a.k.a Porter Ranch) gas leak, seeking to address the climate impacts of one of the largest natural gas leaks in U.S. history. According to the report's preliminary estimates, the incident resulted in about 100,000 tons of methane leaking into the atmosphere.

There's a lot to talk about here, but I was drawn to one important detail in the draft program. 

CARB is asking SoCalGas to prioritize mitigation of an equivalent mass of methane emissions, rather than allowing the company to spread its efforts over a basket of warming-equivalent greenhouse gases. To support the focus on methane mitigation, CARB has proposed using a 20-year global warming potential (GWP) to convert methane into its carbon dioxide equivalent (CO2e) for any non-methane mitigation. This is a big deal because the IPCC's current estimate for the 20-year GWP for methane is 84, whereas the 100-year GWP is 28. As a result, if SoCalGas wanted to mitigate carbon dioxide instead of methane, the 20-year GWP would triple the amount required. 

As far as I know, this would be the first time that a significant climate mitigation policy operated on a 20-year GWP horizon. All of the major international and national policy regimes have used 100-year GWPs, reflecting the long-term nature of the climate challenge. But with more and more focus on the rate of warming, as well as on the contribution of so-called short-lived climate pollutants (SLCPs) like methane and black carbon on overall radiative forcing (W/m2), we may see additional interest in shorter time horizons. 

One last thought. It's little ambiguous whether SoCalGas would need to apply 20-year GWPs to convert non-methane, non-CO2 gases into CO2e; parts of CARB's draft report suggest this would be the case, but I don't think it's explicit. In other words, if SoCalGas wanted to reduce HFC emissions as part of its mitigation obligations, it's not clear whether they should convert HFC emissions to CO2e using 20- or 100-year GWPs, only that the amount of methane to be offset by non-methane mitigation will be converted to CO2e using a 20-year GWP. I hope CARB will clarify this minor detail in its final report. 

Oregon's new RPS and coal divestment policy

Recently I've been thinking about the interaction between western state energy policies and wholesale electricity markets. Many successful state energy policies take the form of "procure resource X" or "divest resource Y"; however, in the context of regionalized wholesale markets, the mechanics become much more complicated.

Case in point: Oregon just passed SB 1547, a bill that doubles the state's RPS by 2040 and requires its two investor-owned utilities to stop serving customers with coal-fired power by 2030.

As Marten Law's Richard Allen puts it

Section 1 of SB 1547 requires that an “electric company” – Pacific Power and PGE – must eliminate “coal-fired resources” from its “allocation of electricity” on or before January 1, 2030. The term “allocation of electricity” is expressly tied to the utility’s rate base for Oregon retail customers[11]—although PGE serves retail customers only in Oregon, Pacific Power serves retail customers in Oregon, Washington and California. The definition of “coal-fired resources,” moreover, recognizes that utilities often make short-term wholesale power purchases to meet customer load. SB 1547 defines “coal-fired resources” to expressly exclude “a limited duration wholesale power purchase made by an electric company for immediate delivery to retail electricity consumers that are located in this state for which the source of the power is not known.”[12]

Because organized wholesale markets generally don't match sources and deliveries, it seems to me this could exempt some kinds of wholesale electricity trading from Oregon's coal divestment policy—especially if Oregon decides to join an expanded CAISO. To use a common metaphor: in organized markets like CAISO, wholesale suppliers dump buckets of water into the reservoir, and wholesale customers take buckets of water out. No one knows whose water goes into which customer's bucket, only that supply matches demand. 

Right now this might not be much of a problem. But if we think about expanding CAISO to include territory in both Oregon as well as states with more coal-fired units, the issue potentially becomes much more significant. Similarly, if regulators can't track the ultimate source of all deliveries, coal still can enter the Oregon retail market via bilateral wholesale imports.

That said, Oregon's new law accomplishes a great deal. Its RPS should create new demand for renewables. The divestment policy sends a clear signal to electricity markets, where the economics disfavor long-term contracts with existing coal-fired power plants and it's almost impossible to build new coal-fired units. In addition, the time horizon on divestment (2030) gives legislators and regulators plenty of time to adjust policies, if necessary. 

Nevertheless, Oregon's divestment policy illustrate the risks of the current state-oriented approach to energy policy. If western states continue on a path towards regionalized wholesale electricity markets, state policymakers will need to grapple with the details of wholesale market design in order to push environmental outcomes beyond what market forces would otherwise deliver. 


More excuses from the Breakthrough Institute on data quality

In a recent journal article, Jonathan Koomey and I criticized Dr. Harry Saunders' work showing high rebound effects and backfire in the U.S. economy. Shortly after our paper came out, we responded to initial comments made by Dr. Saunders and his Breakthrough Institute colleagues on Jon's website and over social media. Now Dr. Saunders has offered a longer defense of his work at the Breakthrough Institute blog. 

Jon and I took a look at his arguments and found them unconvincing, to say the least. Relying on a cursory analysis that suggests national average prices can be used to study pretty much anything in the field of energy economics, Dr. Saunders fails to show that the methodological errors we identified don't affect his results. Simultaneously he places great reliance on a peer review process that was never fully informed about the nature of his data. Whether that is because he withheld critical information from reviewers or merely did not understand the issues we discussed over a year before he submitted his article for publication, it's hardly a flattering picture. It also speaks volumes about the Breakthrough Institute's decision to promote his work so heavily in their much-discussed 2011 report on the rebound effect. 

Links to the original journal articles are available in our new post

The legal origin of the Social Cost of Carbon

Over at High Country News, Elizabeth Shogren just posted a helpful explainer on the federal government's Social Cost of Carbon (SCC). It's definitely worth a read. 

Not only is this piece a useful introduction to one of the Obama Administration's climate policy tools, but it also correctly captures the institutional history of the SCC. Most of the expert discussion around the SCC focuses on the economics community, which developed the three integrated assessment models (IAMs) the federal government used to set the SCC. Climate economists offer a critically important perspective, of course, given the nature of climate damages and inter-temporal tradeoffs the IAMs seek to measure. But a singular focus on economics misses the the legal origin and practical function of the SCC in federal policymaking. 

As Elizabeth Shogren notes, the SCC owes its existence to a lawsuit challenging the Bush Administration's CAFE standards for vehicle fuel efficiency (Center for Biological Diversity v. NHTSA, 538 F.3d 1172 (9th Cir. 2008)). In that case, a number of environmental groups and state Attorneys General sued the federal government, arguing that its CAFE standards didn't go as far as the law required. Among other points, they argued that by ignoring the impacts of climate pollution in the regulatory design, the agency (NHTSA) acted in an arbitrary and capricious manner. The Ninth Circuit agreed, noting that while the court was not positioned to select the appropriate cost number, ignoring the issue—which placed an implicit price of zero dollars on emissions—was arbitrary and capricious, and therefore the policy needed to be revised. 

With this prominent court decision in place, federal agencies knew they would have to account for the cost of climate pollution in future rulemaking. But calculating a reasonable number is a huge lift for any one group, let alone every single agency having to complete that exercise for each regulatory action they take. Rather than place this heavy burden on individual agencies (and risk the development of inconsistent price calculations), the Obama Administration initiated an interagency process to develop a standard estimate for the SCC. In turn, the interagency SCC process distilled the complexity of climate economics into a simple lookup table for agencies to use. 

Many experts are now turning their attention to whether and how the SCC should be improved and used over time. I'll write more later on whether the SCC is having an impact on policy—right now, there aren't any significant examples where the inclusion of the SCC has affected the stringency of policies. But several new papers in climate economics suggest that the IAMs behind the SCC potentially underestimate climate impacts. Were the SCC to be revised upwards, it would be more likely to affect future regulations and any other federal government actions governed by the SCC. 

As luck would have it, the National Academy of Sciences just released its Phase I report on the the SCC and its IAM constituents. The scope of the initial report was intentionally narrow, focusing on just a few technical questions about the structure of IAMs and the presentation of results in the SCC; a more substantial second phase is due out in another year or so. Meanwhile, I'm glad to see that the initial National Academy of Sciences report correctly captures the legal history of the SCC (as did an earlier review from the U.S. Government Accountability Office). 

It's important for economists to remember that the SCC was born in the legal system because the legal system will continue to play an important role in shaping the future of the SCC. I'm encouraged that popular writing and expert reviews are taking note of these connections, and hope that this is a sign that the relevant expert communities are increasingly aware of the connections between academic research and practical policy.