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Analysts Worry Calif. Climate Change Program Is Doing Too Well

ribarnica / Flickr

ribarnica / Flickr

California is swimming in $1.5 billion in new money for clean energy programs and the high-speed rail project, after lawmakers extended the climate-change program, cap-and-trade. But analysts suggest the current boom could ultimately undermine the program’s purpose of cutting long-term emissions.

Sales of cap-and-trade credits—which businesses must obtain in order to legally emit greenhouse gases—have soared in the second half of 2017, after a year of uneven returns.

Since July, when lawmakers voted to renew the cap-and-trade program through 2030, the state has sold every available credit at its quarterly auctions, even as emissions are lower than regulators expected. In other words, companies are buying more credits than they need.

State regulators, academics and analysts generally agree on the reason; businesses are stocking up on credits and holding them for future years.

“It’s a pretty simple comparison of the supply and demand in the market, and it’s not requiring a lot of forecasting,” says Chris Busch of the climate change think tank Energy Innovation.

Companies buying up excess credits now can use them later, when the state’s greenhouse gas targets tighten and the “cap”—the limit on credits offered by the state—lowers. Lawmakers included a provision in the cap-and-trade legislation that allows the banking of credits, one of several safety valves to give businesses more leeway to meet the state’s goals and prevent sudden price spikes.

The danger, Busch says, is the scale of oversupply. He’s preparing a report that suggests businesses are banking enough credits now, when they don’t need them, that they’ll be able to stave off as much as 30 or 40 percent of the cuts cap-and-trade will require next decade.

“Left unaddressed, oversupply and the resulting banked allowances (credits) threaten California’s 2030 emissions reduction success,” Energy Innovation said in a preview of that report last month.

“It could mean a very significant overshoot of the target,” says Michael Wara, an energy attorney at Stanford who has consulted on the cap-and-trade program. “It could well be that we have emissions that are much higher than that, because of overallocation, because of banking, because it makes sense to save up allowances early when it’s cheap to do that.”

Forecasting emissions levels next decade—and therefore the price of credits—is an inexact science at best, and it’s possible the worry is overblown. A University of California, Berkeley study finds it only slightly more likely that cap-and-trade credits will sell for the minimum allowed (suggesting there are more available than businesses need) than that they will sell for the maximum (likely requiring state intervention to prevent price spikes).

Administrators of the cap-and-trade program at the California Air Resources Board are familiar with the overallocation concern, and generally dismiss it. They say they have controls in the program to prevent businesses from hoarding too many credits or oversaturating the market with them.

“There are holding limits,” says Rajinder Sahota, an assistant division chief with ARB. “There are limits to how much entities can actually buy and keep in their accounts, and those holding limits have always been in the program.”

She’s also skeptical many companies will want to spend money now to hold the maximum number of allowances to use in the future. Lastly, the Air Resources Board has authority to alter the total number of credits available each year.

“We have opportunities to adjust along the way,” Sahota says. “This isn’t a one-time deal, and that’s never been the practice of the ARB to put something out there and not monitor it and adjust as necessary.”

Critics worry that regulators, under future governors next decade, may not have the will to take away credits that businesses are relying on—and possibly raise prices in the process.

Lawmakers, environmental groups and industry debated whether to allow banking of credits—and how many—in the lead-up to the program’s extension earlier this year. And, the board will likely discuss it again later this month, when it convenes to approve new rules governing the post-2020 cap-and-trade program.

Ben Bradford

Former State Government Reporter

As the State Government Reporter, Ben covered California politics, policy and the interaction between the two. He previously reported on local and state politics, business, energy, and environment for WFAE in Charlotte, North Carolina.  Read Full Bio 

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