Julie Cart at CALmatters has a follow-up story on how the issue of extra free allocation to industry is playing out in the state legislature. Last week at a Senate Budget Subcommittee hearing on cap-and-trade program revenue spending, Senator Bob Wieckowski raised concerns about ARB's decision to increase free allocation to industry above and beyond what is required under AB 398. CALmatters reports that the Senator indicated he would consider putting language in a cap-and-trade appropriations bill that would reverse ARB's directive in Resolution 17-21 to increase free allocation to industry in the market's third compliance period, 2018-2020.
I want to take a step back and reflect on the arguments from industry, which broadly supports the direction the Air Resources Board gave its staff in Resolution 17-21. Julie Cart quotes Catherine Reheis-Boyd, president of the Western States Petroleum Association, who responded to Senator Wieckoswki's remarks by noting that “the way the allowances are distributed has no impact on how the cap-and-trade program ultimately reduces emissions.” In essence, Ms. Reheis-Boyd is saying we shouldn't worry about how much any individual group pays under the program; instead, we should focus on the bottom line for greenhouse gas emissions. Her argument is textbook environmental economics, and it's fair as far as that goes. But it's also an unsatisfying answer for two reasons.
First, neither ARB nor WSPA has provided a justification for why WSPA members should receive extra benefits from the public. Free allocation is a transfer to special interest groups from the general public, which pays for the costs of climate policy. Sometimes these transfers are justified in order to protect against the risk of emissions leakage—the undesirable outcome in which some companies are put at a competitive disadvantage compared to their competitors who don't face a carbon price. Other times the transfers are pure politics that have nothing to do with leakage. In this case ARB directed staff to reverse course and increase, rather than reduce, free allocation. Some industries might very well need additional support, but the oil and gas industry gets the lion's share—72% of free allowances offered to industry in 2016, with refiners getting 50% of the total (see ARB data here). So as far as I'm concerned, there is plenty of room to ask how effectively a political solution that primarily benefits the oil and gas industry addresses leakage risks—especially given WSPA's central role in the AB 398 negotiations.
Second, if we focus only on greenhouse gas emissions reductions and not whether consumers bear program costs that aren't shared equally with industries, Ms. Reheis-Boyd's argument is still incomplete. As she suggests, the level of free allocation doesn't affect the total number of allowances in circulation; in turn, the total number of allowances is what determines cumulative emissions under the cap-and-trade program. I agree that is important to avoid confusion over these two issues, but Ms. Reheis-Boyd's suggestion that cap-and-trade will deliver emission reductions whether or not any specific industry receives special treatment is unfounded. The program's effects on total emissions will depend on how ARB implements AB 398.
Even if one is concerned only with the cap-and-trade program's effect on cumulative greenhouse gas emissions, industry's influence over the free allocation question is relevant because ARB will decide determine the program's stringency. Right now there are too many allowances in circulation, so the cap-and-trade program is weak and producing little if any effect on emissions. ARB adopted placeholder post-2020 regulations in Resolution 17-21 that do not address the market's oversupply problem. Unless ARB acts to tighten the program during the AB 398 implementation process, cap-and-trade will fall well short of California's climate goals.
From the beginning of the debate over ARB's Resolution 17-21, I have argued that it is fair to ask about the treatment special interests are receiving. Above and beyond those concerns, it is also extremely relevant to observe the fact of political side deals on free allocation that illustrate the influence powerful industries are exercising over the AB 398 implementation process. That influence is cause for concern with respect to the cap-and-trade program's ultimate stringency. ARB can and should do the right thing in addressing market oversupply, reforming its cap-and-trade regulations to deliver a stringent program that helps the state meet its 2030 climate target. But if ARB stays the course and listens to industry during this implementation process, the program outcome is likely to be weak and the state is likely to miss its 2030 climate target.
So whether one cares about the equity impacts of climate policy, the bottom line for emissions, or both, it's time to pay close attention to the Board's actions.