Editor’s note — This is the second of two parts on government regulation and climate change. The first part ran on Friday.
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In California, the man-made global warming/climate change agenda plays out via the Global Warming Solutions Act (AB 32) that was passed by the legislature and signed by Gov. Arnold Schwarzenegger in 2006.
AB32 includes a whole suite of programs to reduce greenhouse gases, according to Stanley Young, communication director for the California Air Resources Board (CARB).
One part of AB 32 allows the state to collect a fee from generators of “greenhouse gases” including: electricity generation facilities; natural gas utilities and intrastate pipelines; end users of natural gas received by interstate pipelines; oil and gas producers that combust or consume natural gas or associated gas produced on-site; transportation fuel producers and importers; cement plants; facilities that combust or consume coal; petroleum coke; catalyst coke; and refinery fuel gas.
In 2010, fees generated by the program came to $62 million. A cost that either had to be absorbed by those businesses or passed along to consumers.
Young said half of the fees collected go towards operating costs and about half go towards the cost of the start-up loan for the program. He said once that’s paid off, the implementation fee will drop.
Another part of AB 32 is called cap-and-trade. Under this program, companies must hold allowances to cover their emission of green house gases — mainly CO2 — but are free to buy additional allowances or sell the ones they hold on the open market. California held its first auction of carbon allowance credits in November 2012 and auctioned roughly 64.4 million credits valued at $780 million.
“We have a total limit or cap on all these industries and on electrical generation in the state,” said Young. “Each year that total cap is reduced by about 3 to 3.5 percent so that by 2020 it’s reduced by 17 to 18 percent. We do not tell facilities how much they can or can’t emit. We leave it to each individual company to decide how they are going to accommodate the cost of carbon in their business strategy. The permits are allowances. If you want to emit three million tons, you have to find three million allowances. We give 90 percent of those allowances for free until 2018. Then we’ll reduce those allowances and are looking at how to do that.”
According to CARB, money from the auctions goes into two areas. Investor-owned utilities like PG&E have to use any proceeds from their sales for the exclusive benefit of their ratepayers. However the proceeds from industrial and transportation related businesses must be used to further the state’s clean energy goals. Recently, Gov. Jerry Brown proposed to use cap-and-trade money to help pay for a $68 billion high-speed rail project.
In one example of how AB32 affects industries and hence consumers, PG&E recently notified its customers it had applied to the California Public Utilities Commission for an increase in what it charges its natural gas customers to recover what it has to pay to comply with AB 32. With $63 million in forecasted costs, PG&E expects to add about .67 cents to people’s monthly gas bills starting in 2015, with additional costs in future years.
However, electric customers may experience a reduction in their bills according to Brandi Ehlers, who is a spokesperson for PG&E. Ehlers said purchasing allowances through the cap-and-trade program will add $270 million to people’s electric bills. However the revenue PG&E will receive from selling allowances through the cap-and-trade auction will generate $454 million.
According to Ehlers, this will result in residential and small business customers seeing a credit starting this year while large industrial operations and large businesses will end up paying more. Whether those businesses choose to absorb that cost or pass it on to consumers is unknown.
The escalating cost of hot air
The passage of AB 32 has other implications for California as far as the financial burden it places on the economy and residents.
Tupper Hull, who is the Vice President of Communications for the Western States Petroleum Association (WSPA), said his employer represents companies that account for the bulk of petroleum exploration, production, refining, transportation and marketing in six western states, including California.
Hall maintains that while AB 32 requires them to reduce air emissions to 1990 levels by 2020, refineries have already done as much as they can.
“There are economic incentives for refineries to operate as efficiently as possible,” he said. “And there are few additional technological things you can do in a refinery to further reduce CO2 emissions. We are left with having to purchase offsets or reduce the amount of fuel produced.”
Offsets are actions companies or organizations can take elsewhere to reduce carbon emissions such as planting trees which take up carbon. Noting that the cost of offsets can fluctuate, he anticipates the cap-and-trade auctions will become like a stock market where buyers and sellers determine the value of carbon at any given time, with the state collecting the auction proceeds.
Hall said while the State of California has already collected hundreds of millions of dollars in cap-and-trade allowances, he and others are less worried about what they are paying today than what the cost will be in the future as he expects prices to sharply escalate, which will affect the economic viability of some of WSPA’s members.
Another worry is with a different requirement of AB 32 that goes into effect in 2018. It mandates that refiners of petroleum fuels begin buying allowances to cover 100 percent of carbon emissions associated with the burning of fuels in cars and trucks. “That’s a five billion cost that’s going to hit and much of that will be passed on directly to consumers of fuel,” Hall said. “It’s just one of those escalating costs that’s just around the corner under this program.”
A different problem with AB 32 is with its low-carbon fuel standard which Hall thinks has the potential to boost the price of gasoline by over $1 a gallon. That standard requires manufacturers of gasoline to reduce the carbon intensity of gasoline by mixing in biofuel or low-carbon intensity alternative fuel. But he claims there is not enough of it out there to supply the gasoline needs of California.
He thinks the new fuel standard will lead to gasoline and diesel fuel shortages and major spikes in the cost of fuel as early as 2015. In the long run, he believes it could result in the loss of 50,000 jobs as refiners cut back on production, switch to distributing rather than manufacturing fuel, or leave the state altogether.
“There is a giant disconnect between what people would like the world to be and what it is,” he noted, adding that California is the third largest consumer of gasoline and diesel on the earth according to the California Energy Commission. Hall said on a daily basis, Californians use 44 million gallons of gasoline, 14 million gallons of diesel and 11 million gallons of jet fuel.
“The energy forecasting unit of the government concludes that by 2040, 78 percent of America’s energy demands will be met by petroleum, coal and natural gas,” he said. “To think that we’re going to remake the energy economy between now and 2020, and to somehow encourage or compel people to radically change the way they live is not realistic and not based on reality.”
Hall predicts that while the law was well intended, continuing down that road is going to be a very hard one as the cost of it is passed on to food producers, to other industries and then eventually to consumers.
“One of big surprises is that hospitals and universities are larger emitters of greenhouse gases,” he added. “I think CARB made changes to the program to reduce the impact on them but they are major emitters of greenhouse gases.”
Unwilling to state any position on the science of man-made global warming/climate change, Hall said, “We are looking at some significant costs for consumers and there’s still time to address those deficiencies and defects in these regulations; to try and get this right so we can continue to be viewed as a leader in environmental policy but not at the expense of our economy and jobs.”
Contact Dawn Hodson at 530-344-5071 or [email protected] Follow @DHodsonMtDemo on Twitter.