Trump and Paris: What Impact on Climate?

President Trump’s decision to withdraw the United States from the Paris Agreement triggered a strong response from the international community, and many foreign leaders quickly denounced the decision and vowed to maintain or increase their nations’ efforts. China and the European Union have announced a new alliance to lead on climate issues. In addition, U.S. states are forming alliances with other nations, with California Governor Jerry Brown traveling to meet with Chinese President Xi Jinping and sign climate partnerships with local Chinese leaders. Governor Brown also participated in an event for the Under 2 Coalition, a group of subnational actors in 33 countries committed to reducing carbon emissions, which he led California to establish in 2015. Yet the loss of U.S. federal leadership is still daunting. Other world players are looking to fill this leadership gap, including new French President Emmanuel Macron who has invited American climate scientists to continue their work in France.

Impacts on U.S. Emissions

U.S. leaders in the private sector and in state and local government are pressing forward. As David Victor notes for the Brookings Institution, the loss of U.S. federal leadership makes the path to achieving the Paris Agreement’s goals harder to achieve, but not impossible. Rhodium Group’s modeling showing the annual emissions projections,  shows that the systematic dismantlement of climate policy by the Trump Administration makes it impossible for the US to attain its 26-28% emissions reduction target. However, uncertainty from a range of other factors, including energy markets dynamics (oil and gas prices in particular) and the health of the economy could drive large variations in emission trajectory, compounding the policy uncertainty around the fate of climate policy and programs targeted by Republicans.

Rhodium Group projections of U.S. greenhouse gas emissions

Even before the Paris Agreement announcement, the administration had worked to impede the nation’s effectiveness on climate issues. Among many other programs in the line of fire, the ability to monitor carbon emissions, with budget cuts proposed to severely limit the Environmental Protection Agency’s Greenhouse Gas Inventory, and eliminate the National Aeronautics and Space Administration (NASA)’s Global Carbon Monitoring program. The loss of these tools would critically undermine the U.S.’ ability to implement and enforce emissions regulations.

Impacts on Adaptation and Resilience Funding, Domestically and Internationally

As part of the withdrawal, Trump announced that the U.S. would end its payments to the Green Climate Fund, falsely claiming that “nobody even knows” where the funding for developing nations is ending up. Yet the fund, which aims to support equally climate mitigation and adaptation projects, fully details 43 projects currently funded from the $10+ billion pledged. By ending its payments, the U.S. cuts $2 billion in expected funding, a serious blow to the fund. It is yet to be seen if other nations will increase their pledges to fill this gap. Trump’s proposed budget will cut grants and funds for the National Oceanic and Atmospheric Administration (NOAA), Department of Housing and Urban Development (HUD), and close to 50% of the EPA’s scientific research programs budget. The proposal belies previous administration claims that their EPA plans would return environmental responsibilities to states, as the budget reduces “state grants for air and water programs by 30 percent.” Other budget cuts may target innovation and fundamental research with cuts for ARPA-E and the Department of Energy.

New U.S. Coalitions Form to Support Paris Agreement 

Though funding to climate programs are at risk, leaders of U.S. cities and states are forming alliances to voice their commitment to achieving the nations’ contributions even without federal government support. The U.S. Climate Alliance, which was formed by the state governors of Washington, New York, and California, is comprised of 13 states and territories make up the alliance representing 35.9% of the country’s population.

The We Are Still In movement, which is led by Michael Bloomberg, seeks to allow subnational entities formally to submit reports on progress to the United Nations Framework Convention on Climate Change, raising questions of whether and how the Framework should allow subnational actors to participate. More than 1200 mayors, governors, college and university leaders, businesses, and investors have pledged to continue to support climate action to meet the Paris Agreement through the We Are Still In; Four Twenty Seven is proud to join these efforts as a signatory.

The effect of these new coalitions is yet to be seen, but the signal they send to other nations and advocates around the world is critical to cushion the blow from the withdrawal of the world’s second largest emitter from the Paris Agreement. The rest of the world has sent a clear signal that they remained committed to fighting climate change, with European leaders, Indian Prime Minister Modi, and Chinese Premier Xi in particular reiterating their commitment in the days that followed the announcement by Donald Trump.

What Now?

The Trump administration has brought new levels of uncertainty to climate policy in the U.S., but efforts to tear down regulatory programs are more likely to create continued confusion and delays than to deal a final blow to efforts to reduce emissions. The greatest uncertainty, however, comes from the broader policy and political context, the ability of the administration to carry out its agenda, and the impact of its proposed policy on the economy.

Meanwhile, many cities and corporations are galvanized. Their efforts to compensate the policy shifts at the federal level will not be enough to make up for the lost budget and policy ambition, but it will ensure the U.S. does not trail too far off its international commitment and keeps an informal but critical presence on the global stage.

Do Federal Agencies Address Climate Risk in the Supply Chain?

The United States Government Accountability Office (GAO) recently released a report on how federal agencies are identifying, evaluating and addressing the impacts of climate change on their supply chains and suppliers.

Current efforts to build resilience in federal agencies

The report set out to identify the key challenges facing 24 surveyed federal agencies who where responsible for 98 percent of procurement budgets in 2013-2014. The agencies included the Department of Defense, the Department of Homeland Security, and NASA. The report was prompted by a question from Congress.

The report surveys how and whether federal agencies have planned for climate change disruptions in their adaptation plans. Indeed, in November 2013, Executive Order 13653 established a directive to these organizations to build adaptation and resilience measures into their organization: “In doing so, agencies should promote:

(1) Engagement and strong partnerships and information sharing at all levels of government;

(2) Risk-informed decision-making and the tools to facilitate it;

(3) Adaptive learning, in which experiences serve as opportunities to inform and adjust future actions; and

(4) Preparedness planning.

Few agencies are planning for climate risk in the supply chain

The report found 25 percent of agencies surveyed did not include climate risk to the agency’s supply chain, and most agencies had only included some information – general or agency-specific risks. Only three agencies had gone as far as identifying potential agency-specific actions, and one had a long term plan and strategy to address those risks.

GAO Analysis of agencies' climate adaptation plans
GAO Analysis of agency climate adaptation plans

Knowledge gaps and lack of tools are the biggest barriers

The report outlined some of the barriers to action on building resilience, citing hurdles such as planning timelines not aligning with federal budget cycles, a lack of institutional knowledge on best practices for assessing risk, and a lack of cross agency coordination to integrate adaptation strategies into shared supply chains.

It also identified information asymmetries about how adaptation success is measured as a hurdle for federal agencies. Of the 24 federal agencies surveyed, only four identified agency specific actions around building supply chain resilience. One in 24 had gone as far as mentioning budget needs to achieve their goals, and seven out of 24 did not attempt to identify the risks of climate change on their supply chains, feeling intimidated by “a lack of defined best practice.”

Getting over the barriers

Supply chains raise complex issues for organizations trying to prepare for climate change. The lack of visibility of supplier location and vulnerability make it difficult to fully assess risks, let alone identify effective measures to address and prevent or mitigate those risks.
At Four Twenty Seven, we have created tools to help large organizations in the government and private sector identify hotspots and quantify climate risk exposure in their supply chain. Learn how we can help your organization map risk across commodities and suppliers and build resilience into your organizational framework.

Supporting Climate Resilience in the Health Care Sector

WH_OSTP_400x400On April 7, 2015 the Obama Administration announced a series of actions and partnerships to help analyze and translate the linkages between climate change and public health impacts for policy makers and citizens alike. The actions build on the Climate Data Initiative, launched in 2014 and includes the release of 150 health related data-sets on “Health Resilience” adding to the existing 500 climate-related data sets now publicly accessible.

Four Twenty Seven is thrilled to take part in this exciting effort. In support of the Climate Data Initiative, Four Twenty Seven will leverage its proprietary model and risk assessment methodology to provide a climate risk assessment for 100 of the country’s health care facilities with large patient populations.

CoverPrimaryCare_Report_Dec2014Building on the vulnerability assessment framework developed as part of the Obama Administration’s Climate Resilience Toolkit, Four Twenty Seven will screen critical health facilities and deliver an interactive, publicly accessible online dashboard that enables users to identify risk hotspots, key drivers of risk, and the types of impacts faced by specific hospitals.

This analysis and dashboard will support decision-making by enabling policy makers to visualize at-risk assets, prioritize resources, and communicate the urgency of boosting climate resilience in health care facilities.

Public-Private Partnerships

This type of public private partnership is key to the Obama Administration’s efforts to leverage big data and technological innovation to address pressing public health issues that are exacerbated by climate impacts. The interactive tool that Four Twenty Seven develops through this partnership will inform decision-makers across sectors and will be publicly accessible creating new opportunities for communities nationwide to engage in this critical discussion.

Other private sector initiatives include efforts from Microsoft, Google, Esri (ArcGIS), EMC Technology and Harvard University, with the shared objective to leverage the new datasets into effective predicting technology and forecasting models.

Through leadership at the local, state and federal level, public health officials and experts have been working to identify the linkages between climate impacts and public health and, importantly, to share best practices and lessons learned to enable implementation of “win-win” solutions that simultaneously address climate change and improve health outcomes.

Actions from the Administration beyond public private partnerships include the development of new tools and guidance, cross-sector workshops to convene key stakeholders, the integration of climate considerations into departmental policies, and training of health care professionals.

Relevant Research and Guidance

Several important reports were also released on this occasion, including:

    • A draft assessment of the impacts of climate change on public health from the US Global Research Change Program
    • A new report from the Public Health Institute (PHI) titled Climate Change, Health and Equity: Opportunities for Action which provides a conceptual framework outlining how these issues are linked and provides recommended policy actions to advance solutions.
    • Adaptation in Action, a report from the Center for Disease Control and Prevention (CDC) that outlines specific successes in a number of cities and regions that have taken action to reduce negative health outcomes from climate change.  In addition, the CDC plans to release a Health Care Facilities Toolkit to promote best practices in resilient health care infrastructure.
Impacts of Climate Change on Human Health. Source: CDC
Impacts of Climate Change on Human Health. Source: CDC
  • At the local level, the City of San Francisco’s Department of Public Health just released its first Climate and Health Profile which highlights the direct health effects of local climate impacts such as reduced air quality and rising temperatures and identifies areas of city that will be disproportionately impacted.

Four Twenty Seven is honored for the opportunity to leverage its models and climate risk assessment methodology to contribute to a greater understanding of vulnerability and resilience in the health care sector and to help bolster socio-economic resilience in the United States.

 

 

Outlook for 2014 California Cap-and-Trade: Politics Take the Center Stage

After a year of incremental regulatory action, 2014 promises to be a year ripe in political developments for California’s cap-and-trade program and climate policy in general. From Sacramento to Washington, DC, we examine key expected developments for the New Year and their potential impact on the California carbon market. You can also download our nifty California Carbon Calendar 2014.

Political Outlook

Complementary policies remain high on the political agenda on both sides on the aisle, and have the most direct potential impact on market balance and prices.

Low Carbon Fuel Standards and Fuels under the Cap

We expect the oil industry will continue its push to delay or amend the Low-Carbon Fuel Standard (LCFS). In court, the Rocky Mountain Farmers Union v. Goldstene case, which caused a temporary stay of the LCFS program earlier this year, has been remanded to District Court after the Court of Appeal judged the program did not discriminate. The revised Court decision is expected in 2014. Any delay or significant change to the program’s compliance schedule would lead to higher emissions in California, and potentially drive prices up on the market.

We also expect the oil industry to continue arguing in the Legislature for free allocation and/or a delay in the inclusion of the fuels in the program. The latter seems less likely, as it would appear as a significant setback for California climate policy, and therefore is unlikely to garner enough support either in the legislative or in the executive branch. Allocation to fuels, on the other hand, is sure to be high on the agenda, and if left to ARB will likely involve fewer free allowances than if legislators have a say.

Renewable Portfolio Standard, Clean Energy and Energy Efficiency Investments

As utilities are well on track to meeting their 33 percent renewable procurement target for 2020, the Legislature started in 2013 a discussion on going above and beyond the 2020 target and setting a more ambitious target – 51 percent – for 2030. We expect similar legislation to resurface in 2014, and the primary holdup against passage is likely to be technical rather than political, as utilities are concerned about ensuring grid stability and reliability with such a high level of renewable integration. A more ambitious RPS would lower emissions in California in 2020 and beyond, and would contribute to keeping prices low in the carbon market.

Revenues from Prop 39 and its implementing legislation have started flowing, with $106 million going to California public schools in 2013. The revenue stream is expected to increase, with up to $500 million going to energy efficiency and clean energy investments yearly over the next five years.

Prop 39 revenues come in addition to the auction proceeds, which must be invested in emission reductions as well. The fate of the fund is in the Governor’s hands, but assuming funds will be directed towards their intended purpose, both investments will contribute to curbing emissions and prices. (Read our recent analysis on budget politics.)

Offsets

The conversation on offsets was largely dominated by SB 605 in 2013, a bill that proposed to restrict offsets to projects in California. We expect similar legislation to be introduced again in 2014, which would carry a risk of driving prices high by creating sudden scarcity in offset supply. Criticisms and questioning of protocols for mine methane and rice cultivation also meant neither protocol got approved in 2013.

We expect 2014 will see a continuation of ARB’s work on new protocols, with mine methane most likely to make it in the regulatory amendment package in the spring. We don’t anticipate any major breakthrough on REDD, in spite of the excellent guidelines laid out by the REDD working group in July 2013. Offsets in general and REDD in particular remain a contentious topic for a number of environmental organizations, and we expect continued push back from these organizations, and the same commitment to extreme caution from ARB.

Post-2020 Policies and Emission Reduction Target

The single most important development for the short and long-term health of the carbon market is the setting of a clear target and policy framework post-2020. ARB has clearly indicated in the October 2013 draft Scoping Plan Update that cap-and-trade would continue past 2020, but stopped short of setting a target for 2030 and beyond. We expect 2014 will see the 2030 target rise on the political agenda – Sen. Fran Pavley, Chair of the CA Senate Select Committee on Climate Change & AB32 Implementation, indicated early December that she would consider sponsoring legislation to establish long term reduction targets for the state.

Climate policy could well become a key issue in the 2014 gubernatorial campaign. Gov. Jerry Brown is said to prepare an announcement as part of his platform for his (likely) re-election campaign. Climate change is high on the agenda for California voters, with 65 percent supporting AB32 goals and policies and saying the government should do more. Gov. Brown sports high approval ratings, 49 percent of likely voters as of December 2013, down from 54 percent in July, and has made climate and clean energy a priority for his administration. Yet his re-election could be challenged, especially in the context of California’s new Top 2 primary system. The 2014 gubernatorial election could play a significant role in bolstering or reshaping California climate policy, which could impact the carbon market as well.

Federal & Global Climate Policy

2014 is also an election year at the federal level, but unless Republicans capture the majority in the Senate, we don’t expect a significant change of course in either direction, as the gridlock in Congress will continue to leave the initiative to the President. The Environmental Policy Agency (EPA) is chugging along on its GHG regulations under the Clean Air Act, which is generally supportive of and compatible with existing state programs (read our analysis on this topic)

It is probably fair to say that the global climate community is more interested in California than the other way round, but generally still worth mentioning that the expectations for the 2014 round of global negotiations are nil, as all eyes are on the December 2015 Paris Conference for a possible international agreement of a sort towards global carbon reductions.

Carbon Market Outlook

Regulatory Changes

Make no mistake – there are still quite a few loose ends to tie up on the regulatory front that will keep market regulators and emitters alike busy through the year.

  • As of January 1st, the linkage with Quebec will become effective, meaning that allowances and offsets issued by the Quebec government will gain full currency in the California market. The first joint auction should take place in May 2014 (not February), according to the Quebec government.
  • ARB staff needs to finalize the regulatory amendments discussed at length through 2013, which contain a variety of provisions addressing industry allocation and product benchmarking, market oversight and information disclosure, conflict of interest rules, cost containment, coal mine methane protocol, and more. Final amendments are expected in the spring.
  • 2014 will see the first partial annual compliance on November 1st, 2014. For the first time, emitters will have to surrender 30 percent of their 2013 emissions to ARB for permanent retirement. This should boost volumes in the secondary market ahead of the surrender deadline, and will be a good opportunity to check whether ARB has ironed all the kinks in terms of retirement order.
  • Who says compliance says emissions true up – ARB will be releasing historical verified emissions for 2013 in probably in the fall 2014, which will likely confirm that the market has indeed started with an excess of allowances compared to emissions.

None of these is expected to have a noticeable price impact except maybe for the CMM offset protocol, but their successful completion is integral to the proper functioning of the market and must be checked off the list.

Market Trends

We expect 2014 will see higher traded volume on the secondary market than in 2013, especially ahead of the partial compliance deadline in the fall 2014. As the second compliance period and its substantially larger cap draw near, we also anticipate oil companies will start buying larger volumes at auctions and over-the-counter. While fundamentals do not point towards a price increase, the sheer size of potential demand from fuel distributors compared to current size of the market could drive up prices a bit towards the end of the year.

We expect the primary market to continue to perform well, and all current and future allowances offered for sale at auctions to be purchased, mainly by compliance entities – in line with auction results so far.

For offsets, as ARB continues to issue compliance-grade offsets, and the market explores the many variants offered by the IETA-sponsored California Emission Trading Master Agreement (CETMA), we expect to see a little more activity in the secondary offset market. But we don’t anticipate a large increase in liquidity as offset contracts will remain, by design, not fungible.

Conclusion

2014 will bring plenty of opportunities for political changes, and derived policy changes, although in California the popular support for climate policy is such that change is likely to mean strengthening and deepening of current policies.

We also anticipate 2014 will see growing emphasis on the issue of climate adaptation. California is in the process of updating its state climate adaptation plan, and since the world is generally failing to address GHG emissions and global climate change, we anticipate climate adaptation will increasingly get people’s attention as the impacts of the changing climate are being felt in California and beyond.

Pin it to your desk! Download Four Twenty Seven’s California Carbon Calendar 2014

Obama’s Climate Action Plan: Good News for AB32, Bearish Signal for California Carbon Prices

Obama rolls up his sleeves and gets to work on climate change
Obama rolls up his sleeves and gets to work on climate change

A little late to the game, but with renewed enthusiasm, President Obama laid out on June 25 a comprehensive climate action plan for the United States with greenhouse gas (GHG) regulations from the Environmental Protection Agenday (EPA) as the centerpiece. How will the regulations interact with California’s carbon market? Is federal action good news or bad news for California?

EPA regulations – a warm embrace for state action

EPA regulations have been years in the making – EPA’s authority to regulate GHG under the Clean Air Act was affirmed by the Supreme Court in 2007 by finding that GHG were, indeed, a harmful pollutant that fell under the authority of the Clean Air Act. The environmental agency has since been laying out all the pieces of the puzzle to prepare for comprehensive GHG regulations. EPA started with regulating “mobile sources” (cars and trucks) – and California played a key role in pushing, pulling and otherwise massaging its cutting-edge state GHG-intensity standard for transportation emissions into federal policy. Similarly, California and other states like New York and Massachusetts were prime movers in the newly announced standards by suing EPA, and they have been have been closely engaged with academic and advocacy groups since to think through how their cap-and-trade programs could fit snugly within the broader EPA regulations rather than be squashed by federal preemption.

It turns out the Clean Air Act (CAA) lends itself well to this exercise. The EPA will unroll its proposal under Section 111, which mandates the EPA to regulate harmful pollutants for new and existing “stationary” sources (power plants, industrial plants, boilers, etc). For existing sources, this section essentially follows the federalist model frequently used in the CAA. It directs EPA to set the standard – for example, how much GHGs power plants should be allowed to emit for each MWh they generate – and let states develop individual plans to implement and enforce this standard.

By many reports, a robust conversation has been taking place over the past years between California, RGGI states and other climate-friendly states, and the EPA, on whether and how the existing state cap-and-trade programs would be an acceptable way for those states to reach whatever standard the feds would eventually set. The answer is, in principle, yes, although much modeling and technical analysis will need to take place to support the states’ argument that they will reach at least an equivalent emission reductions from the pre-existing programs.

Implementing EPA regulations through state cap-and-trade

California and RGGI are grappling with different issues. The issue for California is that its cap-and-trade program covers more than just the power plants in California that EPA’s standard would cover. Instead, the cap-and-trade program covers plants that emit over 25,000 tonnes (instead of EPA’s threshold of 25 MW capacity). It also covers power imports and emissions from most industrial sectors and the transportation sector. It accepts offset credits from a diverse and growing list of altogether different sectors across the country and, potentially, internationally. Finally, the program is also linked to the province of Quebec, which means some of California’s emission reductions might take place out of the U.S. altogether. All these scope questions will need to be disentangled from the effect on California’s specific, regulated facilities. Yet California officials following Obama’s announcement were confident [LINK] that their program would qualify for some form of equivalency under the upcoming regulations.

RGGI has a different challenge ahead: unlike California, the northeastern carbon market covers only the power sector in participating states, and uses the same capacity threshold, but states will need to get the EPA to agree on one plan for all nine states. That’s the essence of emission trading, reductions take place in the most cost-effective location, not necessarily evenly split amongst states – but that might require tweaking to fit under the upcoming regulations.

This could have an unforeseen effect as other states that were hesitant but contemplated local cap-and-trade, like Washington, Hawaii or Illinois, might find that this is their preferred way to meet EPA’s future standards. And if states are allowed to bundle their target and emission reductions, they could even consider linking their program, making for a larger, multi-state carbon market. Many of the former WCI states have remained closely involved in the development of the cap-and-trade program until fairly recently, and could come back into the fold without too much trouble. Besides the politically liberal coastal states Washington and Oregon, heavy emitters with major electricity customers in California, like Utah and Arizona, could find that piggy-backing on California’s program is the cheapest option for their own residents and ratepayers.

Implications for California businesses and regulated entities

For California businesses, federal carbon regulations means going from a situation where California businesses might have faced higher production costs than their out-of-state competitors due to higher electricity and gas prices, to a situation where California companies may be more competitive than the other guys. Cap-and-trade is, in theory, the most efficient way to reach an emission reduction target, so that the cost will be lower than it otherwise might have been under plain regulations.

Moreover, California businesses have been following these rules for five years already. They mostly know what to expect, and can get on with business while their counterparts in other states are still getting up to speed and staffing up their compliance office. Many have made, or plan to make, significant investments in efficiency and other strategies to reduce their carbon costs. Potentially, California businesses that have been engaged with AB 32’s progress to date will have a leg up on companies struggling to follow and comply with new rules, and new uncertainty, in other states.

Market Implications: bearish signal for prices in California

These developments send conflicting price signals. In the short run, Obama’s commitment to climate policy sends a bullish signal for the market’s political viability and long-term support. It bolsters its foundations and makes it less likely to be turned over by a new Governor or struck down for legal reasons. Yet prices have remained flat since Obama’s announcement, possibly indicating that traders were not too worried about the program’s longevity.

A lot of the measures from the climate plan, however, will contribute to bringing emissions down in and out-of-state. In-state, Obama’s climate plan will bring new funding for energy efficiency and renewable projects, and set standards for buildings and appliances that will help meet and further California’s climate goals. In additiona, by forcing all power plants to reduce their emissions in neighboring states, EPA regulations will lower emissions from imported power in California, which are covered under the cap. The combination of the two should lower the cost of compliance for market participants and therefore sends a bearish signal over the long term. The actual impact on emissions will only be quantifiable when the detailed regulations come out, along with details on grants, funding and new standards for the energy sector.

What Would a Federal Carbon Tax Mean for California Cap-and-Trade?

On March 12, 2013, Representatives Henry Waxman (D-CA), Senator Sheldon Whitehouse (D-RI) and others released a discussion draft of legislation for a federal carbon tax – sorry, a carbon “price”. This proposal comes on the heels of another bill proposing to put a price on carbon from the office of… another California lawmaker, Senator Boxer (D), jointly with Senator Sanders (I-VT), from February 2013. Of course it’s no surprise that the leaders on this issue, Sen. Boxer and Rep. Waxman, both hail for California – and yet it’s not clear what those proposals would entail for California’s state policies. Would the Golden State keep its own carbon price, a.k.a. cap-and-trade program? If so, how would the two interact? Would emitters have to pay twice? Or would action on the federal front mean trouble for state programs in California and the Regional Greenhouse Gas Initiative?

How Would a Federal Carbon Tax Price Work?

The Sanders-Boxer proposal is fairly straightforward: $20 a ton, applied to carbon dioxide or methane, rising 5.6% a year over a ten year period. The point of regulation would be upstream: at the coal mine, oil refinery or the natural gas processing point. Revenues would be used in part for energy efficiency and sustainable energy, while 3/5th of the funds would be returned to individuals as a “Family Clean Energy Rebate,” strongly reminiscent of Sen. Cantwell (D-WA)’s cap-and-dividend proposal from 2009.
The Waxman-Whitehouse proposal is more open-ended. It is intended as a starting point for a general debate, not a comprehensive solution. The price point could be anywhere between $15 and $35 a ton, increasing annually 2-8%. The point of regulation is set on the point of emission (“downstream”) for industrial sources, and fuel suppliers for residential and commercial sources. The idea is to line up the fee with the reporting obligation emitters already have with the EPA – but the fee would be collected by the IRS… you know, like a tax. But it’s not a tax, really!
Last but not least, the Waxman-Whitehouse proposal establishes that revenues should be returned to the American people, but lays out several options on how this fine goal might be accomplished:

  • Mitigate energy costs for consumers, especially low-income consumers
  • Reduce the federal deficit
  • Protect the jobs of workers at trade-vulnerable, energy intensive industries
  • Reduce the tax liability for individuals and businesses
  • Invest in other activities to reduce carbon pollution and its impacts

Who Cares About Congress?

Before I proceed with a nerdy analysis of how such a federal carbon price would interact with California’s home-grown carbon price, it is fair to ask: do we care? Since when does Congress do anything about climate change anyway? Having lived five years in DC during the worst (I hope) of partisanship and the rise of the Tea Party, and the spectacular collapse of the federal cap-and-trade bill, I’ll start by saying I’m not holding my breath on any of those bills.
But Congress can’t be ignored either, and a debate on a carbon tax is not as irrelevant as it might have been a few years back. The key here is the dire situation of the federal budget. In the context of the debate over a fiscal reform, a new tax that could bring, in my estimate, anywhere between $80 and $200 billion in 2014 – 10 to 25% of the projected deficit for that year – is nothing to sneeze at. Of course, Republicans generally don’t want new taxes and don’t believe in climate change, but if there’s ever going to be a compromise on plugging that budget deficit, they’re going to have to pick their poison and find a way to raise revenues.
Certainly it’s worth paying attention to the bills out there from a California standpoint, because there’s no easy answer to the question of how a federal carbon tax would impact the California cap-and-trade program – or its East Coast counterpart, RGGI. Let’s look at how that might work.
In my view, if Congress were to pass a carbon tax, one of three things could happen to regional programs:
1. Preemption
2. Stacking
3. Integration

California: Preempt Me Not

In a preemption scenario, the bill would include a provision stating that regional carbon pricing programs are preempted, meaning that the federal carbon price would become the only law of the land, and California would have to discontinue its cap-and-trade program.
Now, there are two immediate issues with this scenario: first, California would NOT be happy. For those who haven’t followed environmental policy in this country for the past 30 years, California feels strongly about being a leader in the field, and is quite fond of federal carve outs and exemptions to do its own (more stringent) thing. And California does carry weight in Congress, especially amongst the environmentally-minded crowd – remember who the bill sponsors are? I’d expect California to fight hard against any preemption provision.
And California might not be alone, too. At this stage, it’s hard to say how New York, Massachusetts, and the rest of the RGGI crowd would feel about preemption. Historically, they wanted to be preempted by a federal program. But that was seven years ago – and before RGGI started generating steady revenues that fund energy efficiency and renewable energy programs in those states. I wouldn’t be surprised if RGGI states now had second thoughts about losing those revenues and all their recent hard work on revamping their program.
Second issue with preemption: what happens to the banked allowances? Say the tax starts in 2015: as of today, there are already 10 million allowances Vintage 15 and 16 in circulation, many more by the time a bill is passed, let alone implemented. Whoever bought those allowances is going to want to make sure they don’t turn into worthless pieces of paper, or rather worthless serial numbers. Regulators and regulated entities interests would be well aligned here, and I would expect a US carbon tax to include a compensation mechanism or a buy-back provision – but even that is not easy to implement.
What is a fair price for buying back the allowances? The November 2012 clearing price ($10.00)? Or the allowances’ value on the secondary market at the time the tax takes effect? Or some average of prices over time? The California transaction tracking system (CITSS) actually records the purchase price of the allowances in any market participant’s bank account, but the question is more one of fairness: is it fair to ‘only’ reimburse $10/t to the forward thinking emitter (or cunning investor) if allowances are worth $15 on the secondary market three years later? I get back to this issue below.

Stacking

Another alternative would be for both programs to live side-by-side, or rather, for the fees to be stacked on top of each other. This is similar to how gasoline taxes work: the federal government taxes gasoline, states tax gasoline, and the taxes are just added on top of each other. Now, I’d expect California emitters to not be very excited about this idea of paying twice for the same ton of carbon, once to the Feds, and another time to the Air Resources Board. It’s hard to see who would support this option, from a political standpoint, which makes me think it’s an unlikely contender.
In addition, it could really mess with prices in the California program: say the Federal tax was $35 and the California market only ‘needed’ a carbon price of $20 to incentivize enough emission reduction (or offset projects) to meet that year’s cap – the California allowances would actually tank to the price floor, because the higher federal tax would incentivize even more reductions than what is needed for the California market to balance.
A lower federal price could also lower prices for California allowances below their equilibrium price. Say if California’s (theoretical) equilibrium price was $30 and the federal tax $15, California prices would go down to $15 – so that entities would end up paying a total price per ton that allows them to be in compliance, with California allowances serving as an adjustment variable on top of or below the federal fixed price. Of course California has a price floor, so CA prices would not go below the floor in any scenario.

Integration: A Little Something for Everybody

There might be a third (and better) way to deal with the overlap between a federal carbon fee and California’s cap-and-trade program. The programs could coexist, but in a way where businesses would not be double-taxed. Think about the way income taxes are handled: you pay both state and federal income taxes, but you get credited for your state tax payments when you file for your federal return, so that your taxes don’t add up, you only pay the difference to the Feds.
Similarly, I could imagine a situation in which California emitters comply with California’s program, and then would get the money they spent on allowances deducted from their federal carbon tax liability. If the price of allowances in California was higher than the U.S. tax, they’d be off the hook altogether, otherwise they would only pay the difference.
Politically, it’s a very appealing option: California gets to keep its own program and impose more stringent standards on its industry if it so desires, yet California emitters don’t get double taxed – they might still end up paying more than the rest of the country, but that’s the cost of doing business in California. It’s a better deal for California than stacking on the taxes, where California revenues would go down, but not such a big difference that the Federal government would care much. I could see such a compromise getting some traction in Congress amongst the supporters of a carbon tax.

Are the Programs Compatible?

Technically, however, not all proposals lend themselves to this kind of integration. The Waxman-Whitehouse is fairly compatible in terms of point of regulation, threshold and price points. Both the draft bill and the California program impose a compliance obligation on downstream emitters and fuel suppliers. The threshold for compliance is lower in California, at 25,000 tons of CO2e/year against 50,000 tons at the federal level, but that’s not an issue – small emitters will only be regulated in California.
For Sanders-Boxer it’s much more complicated, because the point of regulation is completely different. On the one hand coal mines and oil wells would get taxed at the federal level, on the other hand final consumers of coal and oil would be subject to a cap in California – I’m not sure those programs could be integrated, it would have to be either preemption or stacking on.
Even Waxman-Whitehouse is not without its challenges. For one thing, California’s compliance schedule is triennial, with a partial (30%) annual true up, while taxes are annual. If California emitters wanted to take advantage of the flexibility afforded by the three year compliance period, they would not be able to claim a federal tax credit right away. They’d have to pay the full federal carbon tax until they complete their California compliance obligation, which could be up to three years later. Only then would they be able to claim the rest of their federal tax credit.
Another issue, somewhat similar to the one raised in the preemption scenario: what is the fair price for ‘crediting’ allowances at the end of the year? The purchase price? The latest auction clearing price? The end-year price? I would argue that the easiest and fairest option would be a form of average of the vintage price over the calendar year (e.g. average V14 prices in 2014) in the primary (auction) and/or secondary market – but at the end of the day, it will be a political decision.
Should emitters be able to claim free allowances for credit against the federal carbon tax? I would imagine not. If there’s ever a US carbon tax, it would likely include provisions to protect trade exposed, energy intensive industries. Crediting free allowances would amount to double dipping!
The list of issues continues on – how about offsets? Should they be eligible for federal tax crediting as well? There’s no right or wrong here, only political tradeoffs. And finally, what if California proceeds and links with Quebec? Should Quebec allowances be eligible for tax credits in the US? This could raise a whole new level of political problems.

What Does this Mean for the Market?

The market implications for California today are negligible – the odds that a carbon tax bill would pass in Congress are very long, and it is probably reasonable to assume that emitters would, mostly, get compensated for their costs if the California program was shut down. But it undoubtedly adds a new flavor to the remaining political risk attached to the California cap-and-trade program, which it hasn’t completely shaken off yet. And even in a best case scenario, it would add a thick layer of complexity over an already very complex program – something to look forward to!

Photo credit: White House

Will Climate Policy be a Priority for Obama’s Second Mandate?

Newly re-elected President President Obama gave a nod to climate change in his acceptance speech on election night, but reducing the United States’ greenhouse gas (GHG) emissions is still not very high on the President’s agenda for his second term. Yet the looming debate on fiscal reform combined with recent weather events could create an opportunity to introduce a carbon tax.

While global warming was one of Obama’s top priorities going into his first mandate, in 2012, Obama stayed as far away from the topic as he could. Not only was the economy the main issue for both candidates, but it’s also likely that Obama felt vulnerable to attacks against his energy policy record following the high-profile Solyndra bankruptcy in September 2011.

Hurricane Sandy, and maybe more importantly, Mayor Bloomberg’s open editorial tying Sandy to global warming and to presidential politics, brought climate change back on the agenda – though it’s still not very high on the list. Even after Tuesday’s victory, Obama is going to have to tread carefully – the suffering of millions on the East Coast is very real and the path to recovery is going to be a long one, so any attempt (or perceived attempt) to push a political agenda on the back of Sandy’s destruction may not be well received. In addition, the state of the economy remains the absolute top priority, and Obama will not be able to focus on other high profile issues until the economy gets better and the budget deficit gets somewhat under control.

So what, if anything, can we really expect from a second Obama mandate? Well, don’t get too excited. Caution has been the operating concept since Congress’s attempt to pass a cap-and-trade bill went down in flames, and more cautious progress is all we can reasonably expect.

Obama’s biggest success with regards to GHG emissions is undoubtedly the new fuel efficiency (CAFE) standards, set in agreement with the auto industry, which requires new automobiles to meet a fleet-wide average of 54.5 mpg standard by 2025. There is a lot of expectation from the environmental community that he could do the same to address emissions from stationary sources – power plants, industrial facilities – also under the Clean Air Act. Of course, there is also a lot of opposition from those potentially regulated – the power sector in particular – against such a move. Forcing GHG emission reductions under the Clean Air Act via EPA regulations has historically been seen as a second-best solution, even by the EPA administrator, compared to the flexibility afforded by a federal carbon market. If Obama does proceed with EPA regulations, the latest thinking is that states may be able to comply with those standards through their existing cap-and-trade programs, which would provide welcome support to the Regional Greenhouse Gas Initiative and California. As EPA has been under fire from the Republicans over the past two years, I’d expect Obama and Democrats in Congress to explore other solutions before they go the regulatory route.

What other solutions, you ask? Well, cap-and-trade is out of the picture for the foreseeable future, but a carbon tax, which I would not have bet a nickel on a year ago, may be back from the dead. In the context of the looming fiscal cliff, the grown-up solution to address budgetary issues would involve a so-called “grand bargain” between Democrats and Republicans on tax increases and budget cuts. Should this grand bargain take place, it could open a window of opportunity to revamp the overall tax structure of the country, and possibly introduce a carbon tax into the picture. (More on how a tax structure would work on Resources for the Future’s website). And while climate change is not very high on the agenda, fiscal reform is indeed the top priority for both Congress and the President. Sadly for the climate and for the U.S. economy, reaching this grand bargain is still a ways away. Much will depend on whether Congress starts on a fresh, constructive dynamic in January, or if partisan bickering continues to prevail.

Now, none of this may be exciting to those waiting for more aggressive climate policy, but compare to what a Romney administration would have brought: Romney was eager to unravel the new CAFE standard and certainly would have stopped any further rulemaking from the EPA. Cautious progress and “no regrets” investments in clean energy are still better than climate denial and a handcuffed EPA.

Yet, in my view, the most interesting part of Obama’s re-election may lie in what we don’t know. After a summer of drought that brought the Midwest to its knees, and Hurricane Sandy’s freak destructions on the East Coast, having a second-term President who recognizes climate change as an issue and is bent on leaving a positive legacy means more could actually happen. The public opinion in the U.S. has been slowly shifting back, with two-thirds now saying there is solid evidence of global warming, up 10 points from 2009, according a survey by the Pew Research Center. Stay alert for surprises. Nobody wishes more extreme weather events, but they might happen anyway, and may eventually drive the point home in D.C. In the words of the President himself: there is more than one way to skin a cat.

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[Image credit: Flickr/The U.S. Army]

[This article was originally published on Triple Pundit under the title “What Will Obama 2.0 Bring to U.S. Climate Policy?”. Republished with permission]