California’s International Carbon Trading Linkages — Real or Imaginary, Environmental Global Justice or Local Injustice

By Prof. Alan Ramo; Research Assistance by Allyson Umberger

The era of international linkages and offsets as an integral part of California’s Cap-And-Trade program under its AB 32’s global warming regulatory regime is upon us. While this development may have not been widely anticipated in the run up to the auction inaugurating Cap-And-Trade, recent events have made this new development abundantly clear.

Most notably, the California Air Resources Board has adopted a linkage with Quebec, Canada’s program. This follows the Governor Jerry Brown’s findings in a formal letter to the Legislature that the program will be consistent with AB 32’s requirements, as discussed in this Legal Planet blog by UCLA Prof. Ann Carlson.

But Quebec is just the beginning. This blog author participated in a third workshop evaluating a state sponsored working group’s recommendations for linkages to Chiapas in Mexico and Acre in Brazil to provide forestry offsets in California.  The draft REDD Offset Working Group (“ROW”) recommendations are available here.  Meanwhile, Governor Jerry Brown visited China and may be setting the stage for a future linkage with one of that vast nation’s provinces and perhaps beyond.

These linkages raise four important questions. Will industries be shipping money out of state to buy allowances and offsets to avoid emission reductions in California? Will those allowances and offsets be real, that is, will emission reductions due to trading actually take place? Will the source of the offsets and allowances be transparent to Californians and effectively monitored by the Air Resources Board? Will these linkages leverage California’s program to spread Greenhouse Gas reduction globally, or merely create an appearance of spreading reductions around the world?

An earlier CUEL blog documented how the expected reductions from Cap-And-Trade alone, anticipated to come mostly from refineries and power plants, could be dramatically reduced by offsets representing emission reductions far from those major stationary sources of pollution. The numbers turn out to be even worse than we first suspected.

In 2008, the ARB in its Scoping Plan at page 17, Table 2, estimated this additional reduction from Cap-And-Trade to account for 34 MMTCO2E (34 million metric tons of CO2 equivalent) by 2020.   However, in light of the recession and a reevaluation of other measures required by a lawsuit challenging the environmental analysis of the Scoping Plan under the California Environmental Quality Act, the Air Resources Board determined Cap-And-Trade only needed to provide 18 MMTCO2E of reductions. Final Supplement to the AB 32 Scoping Plan Functional Equivalent Document 8/19/2011. P. 12, Table 1.2-3.

Meanwhile, under applicable Air Resources Board regulations limiting offsets to 8% of the total compliance obligations for capped sources, the amount of offsets that are allowed in 2020, are 27 MMTCO2E. ROW Recommendations at 18. Half of that amount, or 4% of total compliance obligations, per Air Resources Board regulations may be allocated to international offsets, that is, 13.5 MMTCO2E, by 2020. Thus, international offsets could replace about 75% of the reductions that were anticipated from Cap-And-Trade to come from power plants and refineries and other capped sources, and together with domestic offsets from farms, forests, and City tree planting could completely eliminate any reductions from power plants and refineries expected to come from Cap-And-Trade. (Note, while offsets are limited to no more than 49% of all of AB32’s reductions, and no more than 8% of the amount of pollution that will be allowed, as described above, the resulting amount of offsets allowed still dwarfs the change in emissions or reductions that AB 32 hoped to achieve solely with Cap-And-Trade.)

So here’s the problem. The Scoping Plan was explicit in promising Californians the secondary health benefits of its program:

Our analysis indicates that implementing the Scoping Plan will result in a reduction of 15 tons per day of combustion-generated soot (PM 2.5) and 61 tons per day of oxides of nitrogen (precursors to smog). These reductions in harmful air pollution would provide the following estimated health benefits in 2020, above and beyond those projected to be achieved as a result of California’s other existing public health protection and improvement efforts:

· An estimated 780 premature deaths statewide will be avoided

· Almost 12,000 incidences of asthma and lower respiratory symptoms will be

avoided

· 77,000 work loss days will be avoided. Scoping Plan, ES 11-12

However, even if the international offsets are real and additional, the specific reductions that could have targeted the disadvantaged communities living near California’s refineries and power plants may be eliminated along with the hoped for secondary health benefits promised in the Scoping Plan and required under AB 32. By the ARB allowing reductions at California refineries or power plants to be “offset”, or even sanctioning increases in emissions through offsets, allowing international offsets to reach 13.5 MMTCO2E would adversely impact disadvantaged communities in violation of AB 32’s requirements, e.g. Cal. Health &Safety Code §38562(b)(2) and (b)(4), and applicable civil rights laws such as Title VI of the federal Civil Rights Act, 42 U.S.C. § 2000d (2012), and California Gov’t Code § 11135, which prohibit acts which have the effect of causing adverse impacts or denial of the benefits of a program that are discriminatory as to race, income or ethnic background.

This potential problem was noted in the Scoping Plan, though the Plan never specifically compared the amount of offsets it was proposing to allow compared to the reductions expected solely from Cap-And-Trade as described above:

While some offsets provide benefits, allowing unlimited offsets would reduce the amount of reductions of greenhouse gas emissions occurring within the sectors covered by the cap-and-trade program. This could reduce the local economic, environmental and public health co-benefits and delay the transition to low-carbon energy systems within the capped sectors that will be necessary to meet our long term climate goals. Scoping Plan, 2008, p. 37.

Interestingly, a similar criticism was made at the onset of Quebec’s Cap-And-Trade system by the Pembina Institute in 2011:

A related factor is the number of offsets allowed in the system. We have concerns that the proposed 8% limit allows too many offsets and will undermine the incentive for companies regulated by the system to reduce their emissions. It will likely result in some accredited offsets that do not represent real reductions.  Recommendations for Quebec’s draft cap-and-trade regulations at 2.

If Quebec companies come to California and soak up our domestic offsets and allowances, or at least purchase them at the same rate as our companies do in Quebec, than California’s program does not suffer or might even have more emission reductions than before. However, the ARB in its press release linked above seems to anticipate just the opposite, that the linkage will provide California companies with a “Large pool of available allowances and approved offsets.” By the way, it will also be a windfall for offset and auction allowance brokers as it “Provides additional opportunities for investment in the carbon market.”

While there may be some uncertainty as to which way funding and emission reductions will flow in the California-Quebec relationship, there is no doubt how funding and emissions reductions will flow with the looming Acre-Brazil and Chiapas-Mexico linkage. Those linkages are based upon recommendations for forestry offsets. The money will flow down South and oil and utility companies will avoid reductions at home in exchange for financing reductions in South and Central America. Unfortunately, all that is being promised is that the so-called reductions will really be just slowing down the tree cutting in these provinces, and that assumes that a reduction in the tree cutting is real, verifiable, and additional to any reductions already taking place, such as in Acre. The blog author has extensively commented on the Mexico and Brazil linkage recommendations which will be retrievable here in a day or so.  A big problem is how will Californians be able to follow the creation of offsets in Quebec, Acre or Chiapas, particularly when the ARB may simply assume that if the jurisdictions have approved the offsets they must be real, particularly if third parties have blessed them.

The upshot is that while the California Air Resources Board promised health benefits here at home from Cap-And-Trade, those may potentially prove illusory in exchange for the appearance of reductions elsewhere in the globe. Whether these offsets really will swamp California’s Cap-And-Trade program or simply spread the regulatory gospel around the world will be settled on the ground based upon the actual implementation of these programs. How many offsets will be created and traded? Will California and these other nations reduce their emissions and to what degree are those reductions traceable to Cap-And-Trade as opposed to automobile direct regulations or renewable energy portfolio standards or California’s low carbon fuel standard or Quebec’ carbon tax? One sign will be the price of allowances and offsets. If they stay at the minimum provided in regulation, about $10 a ton, that would suggest the trading program is a failure. A credit price deflation is exactly what is now happening with Europe’s carbon trading program as that market, in the words of the New York Times, is “fizzling.”

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