Businesses attack California's cap-and-trade auction

dkasler@sacbee.comSeptember 21, 2012 

Just weeks before California embarks on a historic effort to reduce greenhouse gases, regulators and business executives are at war over whether it will work.

The rift was on full display Thursday. Dozens of factory managers, refinery workers and others descended on a California Air Resources Board meeting in Sacramento to demand changes in the state's cap-and-trade carbon market.

They said the market, which kicks off Nov. 14, will impose a $1 billion-plus annual tax that will curb economic growth and chase companies out of the state.

"What we're concerned about is keeping the jobs," said Lisa Bowman, an employee at a Phillips 66 refinery near Los Angeles.

Regulators held their ground, saying the market, a central piece of Assembly Bill 32, the state's global warming law, will be a business-friendly mechanism to reduce carbon emissions.

Mary Nichols, chair of the Air Resources Board, said the market won't be overly burdensome – and she scolded business lobbyists for trying to rewrite the rules with just weeks to go.

"We've gone a long way to make these regulations as simple and palatable as possible," Nichols said. While she said the agency is willing to tweak the market system, she told business groups to stop fighting the agency and "join us to help us make this work."

As a tool for reducing greenhouse gases, carbon trading has been used in Europe for years but has never been tried before on such a comprehensive scale in the United States. California was expecting other Western states to join its cap-and-trade market, but so far only Quebec has signed on.

To business lobbyists, that puts California's economy out on a dangerous limb.

Because industries in other states won't be subjected to the carbon restrictions, California companies will be put at a huge competitive disadvantage, they said.

"We're at very high risk," Bruce Ray of Johns Manville, which operates a building-insulation plant in Willows, told the board.

Opponents say the program's effect will ripple through the economy, as the companies that are directly affected pass the costs on to their customers.

Under the program, more than 400 big industrial users will be subject to an emissions ceiling, or "cap." They will receive tens of millions of emissions allowances, each one representing the right to emit a ton of carbon. The total amount of available carbon credits will decline slightly each year.

Most of the credits will be given out for free, but 10 percent will be sold at a series of state-run auctions beginning Nov. 14. There's a built-in financial incentive to scale back emissions: Companies that have extra allowances can sell them to others.

It's the auction that is triggering protests from business groups. They've taken to citing a recent report by the Legislative Analyst's Office, which said the state can give away all of the carbon credits for free and still achieve its goal of lowering greenhouse gases.

They say the burden of buying credits – $1 billion in the first year, and growing from there – will simply be too high and result in "leakage," the departure of industries to other states.

As companies make plans years ahead of time, "leakage may be happening right now, under our noses," said Dorothy Rothrock of the California Manufacturers & Technology Association.

Phil Newell of Guardian Industries, which runs a glass factory near Fresno, said his plant might have to cut production in order to comply with the program.

"Reducing production means laying people off," he told the board.

The agency is already considering a plan to increase the volume of free carbon credits in future years. Ray and others said they need the additional freebies right away. And some business executives said all the credits should be free, all the time.

Environmentalists, however, said too many freebies will undermine the system and weaken the financial incentive for companies to scrub their smokestacks.

"California should make polluters pay … instead of rewarding them with a public handout," said Jasmin Ansar, an economist with the Union of Concerned Scientists in Berkeley.

Lawrence Goulder, a Stanford University economist who has been advising the Air Resources Board, said he thinks the existing market mechanism will treat businesses fairly.

But he acknowledged that the carbon market is taking California into new territory.

"Industry has reason to be concerned … about the cost impacts," he said.

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