CARB’s Mary Nichols: Fuel Inclusion in Cap & Trade a Necessary Step

On January 1, 2015, motor vehicle fuels will be included in CARB’s cap and trade program. Elaborate on the importance of pricing transportation fuels within California’s program. 

Mary Nichols: The cap and trade program was designed to cover approximately 85 percent of statewide emissions. This is important because there’s a cap on emissions, which gradually declines. That provides us with the assurance that we’re going to meet our goal—getting to 1990 emissions levels of greenhouse gases by the year 2020 and continuing to make reductions after that.

We waited to bring fuels under the cap for a couple of years when we designed the system. We started with the largest industrial emitters because they were all companies that were reporting already, so we knew their emissions. We had to design the allocation system for each of the various economic sectors—oil refineries, power plants, etc.—in order to give everybody a starting point a little bit below their current emissions. Then we had to get them accustomed to the quarterly allowance auctions and the reporting system.

Bringing fuels under the cap expands the number of allowances in the system and makes the whole program much more liquid—meaning there are more allowances available to be traded. Of course, it addresses the single largest source of carbon pollution in California: the combustion of motor vehicle fuels. It’s an important element of the program and has been a part of it since we first adopted the cap and trade regulation. It’s on the books.

On January 1, suppliers of fuels will start being responsible for holding allowances to cover their emissions. But nothing will actually happen on January 1 because that is not a date on which companies have to be in compliance. Compliance is phased in over time.

We know from watching the market that most of the companies subject to this rule have been investing in allowances from the very beginning of the program. Contrary to some of the ads I understand are out there, we don’t expect anything in particular to happen on January 1—unless oil companies decide to try to make something out of it. 

Mary, give our readers a brief description of what you mean by “allowances.”

Under the cap and trade program, any business or entity subject to this regulation has to hold allowances that will cover the amount of their emissions. One allowance equals one ton of emissions. CARB in effect issues these allowances and, at various staggered periods along the way, companies must show that they have enough of them to cover their operations.

Not unlike the other industries and sectors that already are included in CARB’s cap and trade program, there’s some resistance to transportation fuels being included. A bill in the California legislature—AB 69—was introduced by nine Assembly and Senate members, led by Assemblymember Henry Perea. It asks for a delay in including motor vehicle fuels. Could you comment?

The bill is unnecessary and counterproductive. It’s unnecessary because the legislation suggests that we need to take more time to educate the public about this program. We’ve been educating the public about this program since we began AB 32 in 2006. We’ve been very clear and forthright to all of the businesses subject to it about their obligations. We’ve done a lot of analysis. We’ve had hundreds of workshops, meetings, and so forth to talk with them about what the rule requires. We’re very confident that anybody who is subject to this rule knows what they need to do and is capable of complying. It’s like any other rulemaking that we’ve been involved with in the air pollution business: You have to go through a lengthy process before you adopt the rule, and then give people time to comply. We are well along that path.

We don’t take any legislation lightly, but this particular bill does not seem to address a real problem. It’s never had a public hearing. It was an Assembly Bill on a different topic that was gutted and then sent over to the Senate. We’ll have to see what happens to it there. 

Speaking at the VerdeXchange VX2014 Conference in Los Angeles on a plenary titled “The Role of Carrots and Sticks: State Public Policy as a Driver of Markets,” you noted that CARB has focused on meeting the goals of AB 32 while circumnavigating potential impacts on the state’s large economy. Is there evidence to suggest that circumnavigation has been successful and will continue to be so after transportation fuels come under the cap? 

I think the evidence to date clearly shows that AB 32 has not hurt the California economy. As we rebound from the recession, we see a number of instances of sectors where the existence of AB 32 has been a cause for investment and for growth. We remain the single largest attractor of green venture capital. We are the largest venue for solar installations in the country. We have a vibrant and growing set of companies that are investing in clean fuels. These areas all indicate that AB 32 is, as we predicted, good for the California economy.

As far as fuels under the cap, there’s nothing unique about this except that it affects the oil industry directly—instead of other industries that have already been under the cap, have been in compliance now for several years, and have participated in auctions. We’ve held eight (as of August 18) very successful auctions without any evidence of market manipulation, problems, or undue effect on consumers. We have no reason to think that anything is going to change when fuels come under the cap. But we are facing very concerted and well-funded resistance on the part of this industry, which does not want to be part of a program that every other major industry in the state is now involved in. 

Regarding “carrots,” CARB’s Clean Vehicle Rebate Project will offer $116 million in rebates directly to consumers who purchase zero-emission and near-zero emission passenger cars. What returns can Californians expect from such carrot-oriented efforts, and how will CARB measure economic benefit going forward? 

Sales in California have been booming for advanced technology vehicles. All the major companies plan to market more of these models going forward. The actual number in terms of electric vehicle sales is four times the national average.  We are measuring results in terms of reduced gasoline consumption in the state, as a result of the fact that Californians are buying more fuel-efficient vehicles. We’re seeing local agencies adopting plans based on investing transportation dollars in transit, and in bicycle and walking-friendly communities, rather than more expansion of streets and roads.

No one has to buy an electric vehicle. People are buying them because they’re attractive, they’re inexpensive to operate, and they’re fun. I think those are all very good signs for the California economy.

Going forward, we are looking primarily to emissions of greenhouse gases as a metric. That’s how we measure success. That’s the overarching framework. It’s also the thing that has been agreed to by all parts of the administration and the legislature.

Not that we are indifferent to everything else. We care very much about availability, reliability, cost of fuels, and other inputs to the economy. But our survival, literally, is going to depend on whether we can bring down our global emissions of greenhouse gases. Having started down this path to be a model and a demonstration, we have to see whether we’re meeting our targets, and we are. 

Some energy company and sustainability leaders assert that CARB has put too much focus on electric vehicles and not enough on the intermediate opportunities of compressed natural gas (CNG) and emission-reduction technologies that automobile companies and truck companies are using. How would you respond?  

I don’t think it’s true. I would agree that we have our eyes on the prize, which is the longer-term need to reduce the amount of carbon that we use to fuel our economy and our transportation system. But we’ve recognized from the beginning that there are multiple paths to that goal. Our analysis suggests that fuel-cell vehicles and plug-in vehicles, whether pure battery electrics or hybrids using very clean fuels, are as of today the most likely long-term winners. But we understand that for various reasons there are going to be different fuels and different patterns. It’s a multiple-pronged approach. We have been welcoming to all the alternative fuels. 

Could you describe the scope of the Clean Vehicle Rebate Project? Does natural gas qualify?

It’s for electric, hybrid, and fuel-cell vehicles—not for natural-gas vehicles. But that rebate program is only for passenger cars. I think you’d find in talking with vehicle manufacturers or independent transportation analysts that most people think the principal target for natural gas will be in the heavy-duty sector. It replaces diesel.

Natural gas is also going to be a very important source of hydrogen for fuel-cell vehicles, for a long time to come—until we come up with a renewable source of hydrogen, which could be renewable natural gas. I understand that the Gas Company has been vigorously pushing forward its view that we should pay attention to them. I want to assure them that we are.

Last month MIR carried an interview with Paul Gipe, an avid feed-in tariff advocate. He made some provocative statements, such as: “First of all, I don’t think we should have cap-and-trade. I think that’s a dangerously misleading policy. If we’re going to price carbon at all—and I’m not sure that should be the emphasis—then we should use a carbon tax, plain and simple. Cap-and-trade is an ideology masquerading as a public policy. I support feed-in tariffs because it’s a direct policy—it’s not masquerading as something else.” How would you respond? 

First of all, cap and trade is a legitimate alternative to a carbon tax. The effect of both is identical. The reason why California went with cap and trade as opposed to a tax is very simply that the legislature delegated this program to the Air Resources Board. As an agency of the administrative arm of government, we don’t have the power to adopt a tax. We do have the power to adopt a cap and trade program. So we chose that as the preferable way of pricing carbon.

I guess he also doesn’t think that we should price carbon! I think you need to use both pricing economic tools and direct regulation. That’s why our scoping plan is designed the way it is. We have a program that’s built on a base of very direct, very prescriptive regulations, such as the ‘Pavley’ auto emissions standards, the Low Carbon Fuel Standard, mandatory appliance and building efficiency standard, and so forth. Those are the bedrock of the program. Cap and trade is the icing on the cake that assures we’re going to reduce the number of tons that we said we were going to reduce.

No regulation, no matter how effective, can guarantee a particular result. We may make assumptions that 100 percent of our rules are going to be complied with 100 percent of the time, but that would be unrealistic. There’s always going to be some minimal amount of noncompliance, no matter your regulatory system. The cap and trade program measures the exact amount of pollution that is in the atmosphere, rewards people if they do better than what they were assigned, and punishes them if they do worse. But either way, it is a cap. That is its great benefit.

With a tax, you know how much a ton costs but you may not know how many tons are out there. With cap and trade, you don’t necessarily know how much a ton costs, but you know how many of them exist with very great precision. We’re operating with that program as the check on the rest of the system. When we have asked economists to look at the overall cost of this program and its cost effectiveness, they have focused on our use of both direct regulation and cap and trade as the way to get to the goal as cost effectively as possible.

As a point of reference, is CARB tracking how British Columbia’s carbon tax (as opposed to cap and trade) has fared?

Yes, we found that the tax there is pretty popular but also is part of a much broader set of initiatives under way.

Turning to Quebec, Canada—their Ministry of Sustainable Development and Environment has announced plans to conduct a joint practice auction with California and Quebec’s cap and trade programs. Could you elaborate on the potential of synergy? 

We conducted a practice auction before we launched our California-only allowance auctions, as a way to get users of the system comfortable with the mechanics of how you register, how you bid, and the settlement process. It was very useful in making users aware of how it was going to function. When we conducted our first real auction, we had very little in the way of confusion or difficulty. It has continued on fluidly ever since.

After we formally linked with Quebec and agreed that we would be conducting joint auctions with them, hopefully starting as early as November, we built into the schedule a practice auction again. Companies that either have never participated because they’re in Quebec, or are interested in the effect of having Quebec joining with us, will have a chance to try it out without any penalties or financial commitments. If we learn anything as a result, it’s a chance to tweak our software or improve our communications. 

Australia, in contrast, has formally backed off from its cap and trade program as a result of the change in government. Could you address the significance of that decision? 

The current government in Australia made a commitment during the election that they were going to abandon their cap and trade program, which was often characterized as a carbon tax. It didn’t come as any surprise that they did. It was a repudiation of the policies of the previous labor government.

The current government has stated their intention to continue their commitment to the Kyoto Accord and to reducing the tons that they had pledged they would reduce. But they’ve indicated they are going to do it by some system of incentives, which has yet to be worked out.

This is not a change in policy that was being promoted by the business community. In fact, the largest organization of businesses in Australia supported continuation of the cap and trade program.

In the legislation, which we’re still trying to understand, it appears that they kept some of the elements of the system in place but not the trading piece. In any event, we know that Australia is still on record as wanting to be a player internationally in reducing carbon and showing how to do it, so we’ll be following their activities. 

Would you bring our readers to speed regarding other ongoing AB32 policy developments, including the recent judicial decision to uphold the Low Carbon Fuel Standard and plans for California post-2020? 

Right now we’re working with the other energy agencies on analysis of the post-2020 targets and how best to achieve them. We’re planning on putting out something for public review and comment in the fall, probably September or October. We’re certainly hoping that after November, this administration will be in a position to put forth a proposal to the legislature for a midterm target—and also to be more clear about the mix of policies and strategies that we think are going to take us there and beyond, to 2050 if at all possible.

We’d like to do that in a way that also meets our air quality goals, which remain in many ways more challenging than climate pollution reduction. Meeting the ozone standards in the South Coast and San Joaquin basins is an even more challenging task when it comes to pushing technologies to and beyond the limits of what’s available to us today. We’re trying to come up with a set of policies that provide some predictability and long-term stability, so that businesses can invest and be assured that we’re on a path we intend to stick to. But at the same time, policies need to allow for flexibility if and when we learn new things, as we realize we’re likely to do moving forward.

This has been our approach from the beginning of AB 32 implementation—recognizing that in order to really transform our economy away from dependence on carbon fuels, we need to send signals to the market so that people can and will invest. But at the same time, our actions also need to reflect that the science in this area is evolving. We need to be nimble.

I’ll give you an example: carbon capture and sequestration. Back in 2007, people were talking about the need to have carbon capture and sequestration as a tool, since inevitably we were going to have to continue using some fossil fuels for generating electricity and powering manufacturing businesses. The focus was on geological sequestration. Increasingly, researchers have been coming up with interesting and even relatively inexpensive ways to capture carbon from a smokestack, tailpipe, or waste stream. Now they’re beginning to look at ways you could utilize that carbon for other things. We’re a long way from knowing what the best, cheapest, and most environmentally acceptable solution is going to be. The federal government is funding a lot of work in this area, as is the private sector. But we clearly need more work before we are able to predict with any accuracy how effective these technologies will be or what they’ll cost.

Lastly, Mary, you’ve been formally involved in the national and state efforts on air quality and carbon emissions for more than two decades. How would you characterize the evolution of greenhouse gas emission policy over the last 20-plus years? 

We have gotten to the point now where the federal government is willing and in a position—thanks to President Obama and EPA—to take a national stance that we have to reduce greenhouse gas emissions from burning fossil fuels. This is a long way from where we were when I started down this path, even though the necessity to do that has been known for a very long time.

The administration in Washington has been willing to step up to its obligations internationally to make a commitment to reduce emissions and to use its regulatory power to make the changes that are needed. I think the 111(d) proposal is very moderate. It’s very carefully designed to encourage states to look at ways they can cost-effectively reduce their overall emissions and collaborate with each other to come up with market-based programs that will make the efforts relatively inexpensive and doable.

Obviously there is still resistance out there. There are states suing to prevent these measures from going forward. But at the same time, we’re also seeing states beginning to talk to each other. I’ve been very active in this effort to find practical ways we can collaborate to achieve the targets set in the EPA 111(d) proposal.

The Obama administration took the California greenhouse gas emissions standards for vehicles and converted them into a national program. So we now see the two major sources of emissions being addressed nationally, even though there’s never been any comprehensive climate legislation adopted by Congress.

The connection between greenhouse gas emissions and conventional air pollution is increasingly being recognized. First, the sources are obviously the same. We’re talking about cars, power plants, and combustion. But there’s another connection I think is going to be talked about more in coming years, and is already beginning to be addressed a little bit. While we’re trying to design programs and install technologies that will reduce the most long-lived climate pollutants—mainly carbon dioxide—we’re also seeing that we could gain some ground quickly by addressing short-lived climate pollutants, such as black carbon.

We could address at the national level steps that California took years ago because of our concerns about health and localized air quality, including requiring cleaner diesel fuel, getting the sulfur out of diesel fuel, and cleaning up heavy duty engines. Those measures have also made a huge difference—in the close-to-90-percent range—in reducing the emissions of black carbon in our state. We’ve got the short-term health benefits; the benefits in terms of reducing ugly, smelly, black smoke on our highways and in our urban areas; and we also have addressed one of the potent causes of warming in the atmosphere.

There’s increasing interest on the part of other countries and jurisdictions concerned about climate change to assess how these measures may be relevant to them. In our conversations with China, Mexico, and India, this issue has been coming up. I think this is going to be of great significance in the next couple of years.