New Leadership for ARB: The Long-Term View

James Goldstene is leaving the California Air Resources Board. Governor Brown’s office announced on March 20, 2013 that Goldstene was appointed undersecretary at the California State and Consumer Services Agency. Goldstene played an instrumental role in developing cap-and-trade regulations since he took the helm of the Air Resources Board as Executive Director in 2007, in tandem with Mary Nichols. He had a clear mandate to turn AB32 into a workable set of regulations that would take California towards its 2020 emission reduction targets, 427 mt CO2e, and delivered effectively on this mission.

Limited Short-Term Impacts

Yet, while the news comes somewhat unexpected, the short-term market impact should be fairly neutral – until the Board nominates a new Executive Director. The cap-and-trade regulations are 95 per cent finished, the program is already underway, so this is actually a fairly good time for a change of leadership, in that it is not disruptive to any ongoing processes related to market regulations. Most importantly, as long as Mary Nichols remains Chair of the Board, the overall strategy and direction for the agency remains unchanged, and Nichols’ commitment to cap-and-trade has been unwavering for the past five years.

More Regulatory Changes in the Works

The new executive director, however, will have some major new regulatory development on his or her hands, which will impact the long-term outlook for the California market. Most immediately, California’s landmark law AB32 requires the Air Resources Board to update the Scoping Plan every five years. The Scoping Plan was first adopted in 2008, which means ARB is due for an update by year end. This could be meaningful to the market as the Scoping Plan is the strategic document that maps out a detailed implementation path for AB32. In its current form, it ‘assigns’ a certain amount of reductions to policies like the Low Carbon Fuel Standards, Clean Car Standards, etc., while the cap-and-trade program is responsible for delivering the rest of the emission reductions. Whether and how this division of labor between different policies changes going forward could significantly alter the demand for California allowances.
Second important regulatory development: how will fuels be handled under the cap? Gasoline, natural gas and other fuels are due to be covered by the cap-and-trade program starting in 2015, but the specifics of how this will happen are still up in the air. Granted, the oil and gas industry has not given up on getting off the hook and is intensely lobbying Sacramento decision-makers to not be included in the program. But assuming those efforts don’t bear to fruition, ARB will be working hard on figuring out how to include mobile sources under a cap, for the first time in a major emission trading program (no offense to the Kiwis, of course).

Beyond 2020

Last but not least, what happens after 2020 is very quickly going to become today’s problem and a price driver for the market. Governor Schwarzenegger’s Executive Order S-3-05, signed in June 2005, establishes a GHG reduction target for California of 80 percent below 1990 emissions. California would have to reduce its total emissions to 85 mt by 2050 – a goal that will require “significant innovation and advancements in multiple technologies” according to the California Council of Science and Technology (California’s Energy Future – the View to 2050).
This is ‘only’ an Executive Order, but I would expect the California legislature to start looking beyond 2020 soon, and this target may well become law in the coming years – and ARB will logically be instrumental in translating this long-term goal into regulations applying across the board in California.
Circling back to cap-and-trade – why does it matter for the market? In my view, prices today are largely driven by the long-term expectation that the market will be short later in the game – say in the third compliance period, 2018-2020. After 2020 is a big question mark. If you replace this question mark by a steep cap on emissions, prices will go up right away.
All this to say: it is not a bad time for ARB to change Executive Director, but who fills in Goldstene’s shoes will very much matter. He or she will matter in the short run, as the remaining bits of cap-and-trade regulations come through the pipeline before the summer, and in the long-term, as California continues to take on more aggressive emission reduction targets and ARB is tasked with writing the fine prints of California’s ambitions.

Photo credit: California Air Resources Board