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The California Chamber of Commerce (CalChamber) released a whitepaper with estimates for the cost of cap-and-trade allowances, which will be sold on the market to entities that need to reduce emissions but cannot implement enough technology or reduction measures to do so by the compliance periods. Those estimates range from $14 to $60 per ton.
One concern among impacted facilities is that the costs of these allowances will only rise once they hit the market. To address this concern, Clegern said, the AB 32 Scoping Plan has a “soft collar” in place that allows ARB to pull allowances into a cost-containment reserve annually. The first cost tier of allowances in this reserve is $40.
On a first come, first serve basis, ARB would allow facilities to purchase the price-fixed allowances. Depending on what happens to the allowance cost once introduced to the market, the $40 price may be high or low. Facilities that do purchase these particular allowances may do so with the idea in mind that prices down the road will exceed $40. Only covered facilities – not brokers – would be able to access the containment reserve.
According to Clegern, another means of keeping the cost of purchasing allowances down for impacted entities is the use of offsets. Offsets are projects proposed by developers that reduce carbon emissions, and must be approved by ARB before they become available to entities under cap-and-trade. Offsets may be used to cover up to 8 percent of emissions above the 25,000 metric-ton threshold for compliance.
At the first auction, ARB estimates about 61 million allowances will be put on the market. Estimates by the CalChamber are above 100 million. Based on the CalChamber estimate, regulated entities will bear $1.4 billion for the cost of auctioning allowances. Clegern said CalChamber likely chose a higher price per ton to achieve that number, and ARB projections are $660 million to $1 billion for all of the allowances.
Funds raised by selling allowances and offsets go into a sub-fund of the California Air Pollution Control Fund called the greenhouse gas reduction fund. Once funds begin to accumulate in the sub-fund, the state legislature and governor would determine how to spend the money as it applies to AB 32.
At the end of each of the compliance periods, regulated entities must “true up,” according to Clegern.
“They have to account for everything from that compliance period – emission reductions, allowances and offsets – to meet their 10 percent,” he said. “If they go with offsets, they only have to cover 2 percent.” Clegern said entities can put the cost of carbon in their business plans to prepare for compliance.
There is only one current lawsuit against AB 32 regulations, filed by the Citizens Climate Lobby and Our Children’s Earth Foundation, under the premise that ARB should not be using offsets.
“We are fairly sure that we will prevail on that,” Clegern said. “Offsets are nothing new, and our program is built with extremely stringent, probably the most stringent rules for offsets in the world. The suit is to be heard sometime later this year.”
Private companies aren’t the only entities preparing for AB 32 regulations. The University of California (UC) and California State University (CSU) systems both have a number of campuses that will need to report and find ways to reduce emissions levels.
Paul Wingco, energy and sustainability manager at CSU Long Beach, said the local campus’ emissions level is below the cap-and-trade threshold but is above the 10,000 metric-ton threshold for mandatory reporting.
“That doesn’t mean we aren’t keeping an eye on cap-and-trade,” Wingco said. “We are certainly doing as much as we can to make sure we gradually start reducing our carbon emissions. The CSU Chancellor’s Office is coordinating what we need to report and when we need to report.”
Len Pettis, chief of plant, energy and utilities for the CSU system, said there are only three campuses under cap-and-trade at this point – San Diego State University, San Jose State University and California State University, Channel Islands. All other CSU campuses are below the 25,000 metric-ton threshold, he said, but the UC system is four or five times worse off than the CSU system.
The reason these university campuses are under cap-and-trade is because they are energy producers. According to Pettis, the state funded a project in the 1980s to develop small, distributed energy facilities on state properties – universities, prisons, state hospitals and others.
“The state spent a significant amount of money, to the benefit of all parties, to develop these projects where waste heat is used to make steam and hot water for things like laundries and sterilization,” he said. “There are still a bunch of these facilities that were built to last with a 30-plus-year life. Almost all of them have been repowered and retooled, and are quite efficient.”
CSU inherited one of these facilities at the Channel Islands campus, Pettis said.
“The irony of this whole thing is that now that we have this asset that was funded back in the mid-1980s, we’re now being penalized for operating that,” he said. “We’re better off not running it now, which makes no sense at all because it’s 15 percent more efficient than the power we would otherwise buy from Edison.”
To get the campuses impacted by cap-and-trade below the threshold, CSU will need to make a $75 million to $100 million investment over the next 15 to 20 years, either tearing down and building new infrastructure or modernizing existing infrastructure.
“We’ve lowered consumption and created efficiency, thus savings, but it’s negated by new technology costs,” Pettis said.
ARB is looking at how entities like CSU campuses are operating and what their situation is, according to Clegern.
“There are two categories here. There are the schools, which are one category, and then there are some industrial facilities that are called the ‘but for’ facilities,” he said. “Basically, what that translates into is but for their combined heat and power capacity, they would not be over the 25,000 metric-ton threshold. So we’re working with them on the one hand, and the universities on the other. There may be some overlap, but right now we’re trying to figure out who’s on first with those things.”
Other power generators, specifically public utilities, are looked at differently under AB 32, according to Clegern. ARB is working with the Metropolitan Water District of Southern California and the California Department of Water Resources because they both import power.
“Imported power is factored into a compliance obligation relative to what the source of the energy is,” Clegern said. “If they’re pulling in power from a coal plant, it’s got to be accounted for. If they’re pulling in hydro [power], that’s much less of a factor. . . . We can’t let them off the hook for emissions generated by the generation of that power.”
All utilities that import power have to report to ARB under AB 32, but the board is working with these two public utilities “because they have a special situation,” Clegern said.
ARB is also in ongoing negotiations with federal agencies that would be impacted by AB 32. Those agencies, Bonago Power Administration and the Western Association of Power Agencies, are both located in Northern California.
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