For four years oil companies, airlines and ground transportation industry groups have petitioned California for exemptions from the state’s cap-and-trade greenhouse gas market, saying consumers would take the hit through higher prices at the pump and in stores. And in court they are still arguing that the state lacks the regulatory authority to compel participation.
To a degree, they have succeeded. A constant stream of policy papers, letters to state agencies and lawsuits preceded exemptions from state greenhouse gas restrictions potentially worth millions of dollars.
Officials at the California Air Resources Board say they have listened carefully to business concerns since they began drafting the complex rules governing the cap-and-trade program in 2009. But some critics say that allowing industry to influence the regulations after the program started could itself cause economic volatility.
The transportation fuels industry won a two-year delay in its participation in cap-and-trade. In 2010 companies and industry associations argued that entering the program by 2012 would hurt the economy and penalize consumers.
A panel of experts in 2007 recommended transportation fuels be included on schedule to “encourage owners of conventional fuel cars to make more socially efficient decisions as to how much to drive.”
Ultimately, though, regulators approved the delay, citing the lack of accurate pollution data from transportation fuels producers. Compliance is set to begin in 2015, just five years before the program’s reduction targets are supposed to be met.
Jet fuel comprises 3 percent of U.S. greenhouse gas emissions, according the U.S. Environmental Protection Agency. But airlines argued that they should not be covered under California cap-and-trade, writing in 2010 that federal aviation laws precluded states from regulating aircraft fuel. The Air Resources Board never brought the airline industry into the program.
Now the trucking industry is reviving arguments that challenge the regulations head-on. In a lawsuit filed against the state in April, the industry asks to invalidate the entire cap-and-trade system, alleging it was a tax passed improperly without the required two-thirds vote in the Legislature.
Many industries are motivated to avoid participating in cap-and-trade. From an estimated $2 billion this year, California’s carbon market is forecast to grow to $10 billion by 2016, according to Point Carbon, a division of Thomson Reuters. The transportation sector’s greenhouse gas emissions are 38 percent of the total.
Some analysts predict the price of an “allowance” to pollute could soar to $70 per metric ton of carbon dioxide or other greenhouse gas equivalent by next decade.
Mary D. Nichols, chair of the Air Resources Board, said her staff pays attention to business concerns because they realize that a poorly planned carbon-trading scheme could wreak havoc in the state’s still struggling economy. The agency has enormous leeway to change the rules as the program rolls out.
“We are now looking at some further amendments to the program, further refinements,” Nichols said. “We want to make sure we are being sensitive to any possible run-up in prices of allowances.”
While pushback on regulation abounds, “our greatest challenge is the transportation sector,” she said.
The cap-and-trade program, a key piece of the Global Warming Solutions Act of 2006, limits total carbon emissions from large-scale polluters in California, including refineries, cement plants and utilities that yearly emit more than 25,000 metric tons of carbon dioxide or the equivalent in methane, refrigerants and other gases. The goal of the law is to reduce carbon pollution to 1990 levels by 2020, and further in the decades to come.
If regulated companies cannot or choose not to lower emissions to capped levels, they can purchase “allowances” in quarterly online auctions or directly from other polluters that can lower their emissions by reducing production or turning to new technologies. They can also buy “offsets,” which send money to environmental projects around the country that reduce or absorb greenhouse gases.
GAS SHOCKS POSSIBLE
Some market analysts say it is not the cap-and-trade program itself, but rather the sustained lobbying by the transportation fuels industry that could disrupt California’s economy and its ability to regulate pollution equitably and efficiently.
“The continued lobbying from a number of oil companies to change the cap-and-trade provisions for 2015 and after could also bring sudden shifts in supply and demand outlook,” said Emilie Mazzacurati, managing director of Four Twenty Seven, a climate consulting firm in Berkeley.
The Air Resources Board said in June that there were no plans to modify the rules of cap- and-trade to bestow additional advantages on transportation companies. Still, some fuel producers warn that they will leave the state rather than comply with new restrictions.
In addition to cap-and-trade, they object to another provision of the state’s climate rules governing requirements for low-carbon fuels, which they argue would be too costly.
Guy Bjerke, manager of the Bay Area region of the Western States Petroleum Association, a trade group in Sacramento, said that complying with climate regulations would add $5 billion to oil industry costs. “It means we’ll either make fuel at a much increased cost, or refineries will stop making fuel,” he said.
The Boston Consulting Group estimated for the association that the cost of producing gasoline and diesel would rise between 49 and 69 cents per gallon if producers had to purchase carbon allowances through cap-and-trade for emissions beyond their industry’s cap.
Not everyone endorses Big Oil’s predictions. Adrienne Alvord, California and Western States director of the Union of Concerned Scientists, a nonprofit advocacy and research group based in Cambridge, Mass., disputed the argument that California refineries would lose their competitive edge to those in other states by participating in cap-and-trade. She said the industry is undergoing a major consolidation, which could lead to closures of refineries, but that process is not being driven by greenhouse gas restrictions.
TRUCKERS REBEL
Two trucking industry groups, the American Trucking Associations and the California Trucking Association, said in correspondence with regulators that complying with cap-and-trade would increase the cost of diesel fuel, so the costs of all consumer goods moved by truck, from televisions to green beans, would rise as well.
The industry has been building the case for exemption for years. In a letter to the Air Resources Board in January 2010, the American Trucking Association cited one industry prediction that complying with cap-and-trade would raise the cost of diesel by as much as 88 cents per gallon.
“Cap-and-trade will not only increase the price of diesel fuel, it also will increase the volatility of diesel prices,” wrote Michael Tunnell, the association’s director of environmental affairs. He added that truckers would have no incentive to consume less diesel. “Trucking is not a discretionary consumer of fuel,” he wrote.
In an interview, Tunnell reiterated that transportation fuels should not be part of cap-and-trade. He said commercial truckers operate on thin margins, typically 2 to 4 percent, so cap-and-trade would threaten their business model. The association argues that California should instead push for moderate national fuel economy standards.
PROMISING START
Just a few months after its November launch, California’s cap-and-trade program appears to be functioning as planned. The Air Resources Board has held three quarterly digital auctions to give companies an opportunity to purchase allowances.
On May 16, 14,522,048 metric tons of carbon were traded. A single allowance went for $14, up from $10.09 in November. There is also a market for allowances extending to 2016, indicating that businesses are thinking ahead about their emissions. Analysts, environmentalists and academics say rising prices indicate that polluters and other traders trust that the cap-and-trade program will continue to operate as planned.
Dan Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, said the auction results — plus an array of other state climate change rules — lend assurance that cap-and-trade will survive challenges, and emissions will start to fall.
California has a “dense network of thoughtful rules on energy and climate,” he said, including the low-carbon fuel standard and land-use regulation designed to reduce vehicle emissions by promoting transit-oriented development. That means cap-and-trade “is reinforced in ways that should keep the sector on pace to emissions reductions.”
AIRLINES, REFINERIES PROFIT
The airline industry has employed several arguments to try to exempt jet fuel from regulation. In a January 2010 letter to the Air Resources Board, Kevin Welsh, then the environmental affairs regulatory manager at the Air Transport Association of America (now known as Airlines for America) cited a provision of the Clean Air Act that prohibits states from enforcing emissions standards different from those set by the U.S. Environmental Protection Agency.
The correspondence files also show that some oil corporations demanded transportation fuels be left out of the carbon market entirely.
“Do not include transportation fuels in the cap and trade program,” wrote Stephen D. Burns, who was manager of California Government Affairs at Chevron, in a 2010 letter to the agency. He wrote that carbon emissions from transportation fuels should be regulated in other ways, to “drive innovative fuel technology and ensure reliable supplies” for customers.
The Western States Petroleum Association said in a letter that it opposed the “acceleration” of including fuels in cap-and-trade, from 2015 back to 2012. The Air Resources Board “must first analyze the potential impacts, especially the economic impacts” before developing such regulations. In its own correspondence with regulators, British Petroleum echoed that position.
Dave Clegern, a spokesman for the Air Resources Board, said the agency decided to wait until 2015 to bring transportation fuels under the cap-and-trade program because regulators wanted to collect more data on emissions levels at their production facilities.
“We need a certain number of years of mandatory reporting data,” he said. “And we also need to know how much they’re emitting in the air, so we know where they fit under the cap.”
LAWSUITS TAKE AIM
Oil producers and transportation industry associations are not relying on letters alone to press their case. In April, the Pacific Legal Foundation filed a case in California Superior Court charging that cap-and-trade violates the California Constitution because the state receives revenue from selling some allowances.
That suit — filed on behalf of Morning Star Packing Company, Dalton Trucking, the California Construction Trucking Association and other companies in the farming and logging industries — argues that taxes can only be imposed by a two-thirds vote in the Legislature. It mirrors a similar filing by the California Chamber of Commerce on the eve of the cap-and-trade launch in November. Both cases will be tried in a combined hearing on Aug. 28 in state Superior Court in Sacramento, according to court documents.
Chevron and the Western States Petroleum Association filed a lawsuit in 2011 challenging the state’s low-carbon fuel standard, considered an essential complementary regulation. A U.S. district judge in Fresno ruled in December of that year that California’s regulation for lowering the carbon content of fuel was unconstitutional because the attempt to regulate commerce across state borders discriminated against non-California companies. The Air Resources Board appealed and is awaiting a decision from the 9th U.S. Circuit Court of Appeals.
This story is part of a special report on California’s cap-and-trade program, in collaboration with Earth Island Journal and Bay Nature magazine. It was made possible by the Fund for Investigative Journalism.
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