Crunch time for AB 32

California is not well. It’s not exactly a failed state, but it’s far from the optimistic Golden State that it once was—one that did impressive things, like building highways and aqueducts and universities that were the envy of the world. Here in his last year in office, the state’s governor has lost a bit of his luster, too. Arnold Schwarzenegger is unlikely to be remembered as a political reformer or an adept fiscal manager.

But he may still be remembered as the “green governor,” who ushered in California’s landmark, sweeping global-warming law, Assembly Bill 32, also known as California’s Global Warming Solutions Act. The governor who built the green economy.

Schwarzenegger signed the law in 2006, and for four years state regulators from the California Air Resources Board—the agency charged with implementing AB 32—have been laboriously crafting rules that likely will change the way business is done in the state.

But it’s now crunch time for AB 32.

Major elements of the law go into effect this year, and others are coming up for approval, including a controversial and complicated “cap-and-trade” system of buying and selling pollution credits that likely will have an impact far beyond California.

Meanwhile, California’s experiment in fighting climate change may be over before it gets started, if some conservative and business groups have their way. Republican gubernatorial candidate Meg Whitman has already promised that if elected she will immediately issue an executive order to suspend AB 32 for a year. Her GOP rival, Steve Poizner, is even more hostile to the law, and has thrown his support behind a proposed ballot measure that would suspend the law indefinitely, until the state reaches unemployment levels below 5.5 percent.

And Dan Logue, a Republican from Linda who represents District 3, which includes Butte County, is heading up a well-funded effort to put an initiative on the November ballot that would forestall implementation of AB 32’s provisions for years to come.

“I think you’re seeing a pretty well-organized and well-funded attempt to roll back AB 32,” said Derek Walker, with the Environmental Defense Fund, one of the early sponsors of the law. “You have to take that seriously, because the economy is the first thing people think about when they wake up in the morning and the last thing they think about when they go to sleep at night.”

But backers argue that abandoning AB 32 is the worst choice for California’s economy—which is already being transformed by the sweeping law. “If we put this stuff in the deep freeze, the other states are going to catch up to us,” said CARB spokesman Stanley Young. “Right now $3 out of every $5 invested in clean tech is coming to California. That’s reflective of our forward-thinking climate policies.”

There would be no AB 32 without the decades of pioneering California laws that went before it. To take just one example: In the 1990s, California’s “zero-emissions vehicle mandate,” though controversial and repeatedly watered down, helped to introduce the hybrid cars that have become so commonplace today.

Fast-forward to the early 2000s, and laws like California’s clean-car rules, requiring that new cars sold in California emit fewer greenhouse gases from their tailpipes; the Obama administration has since said the law should be the standard for the entire country.

Before that it was California’s renewable portfolio standard, which requires electric utilities to meet a 20 percent renewable-energy target by the year 2010. They’ll come up short this year, but the renewable-energy standard and the clean rules have become critical parts of California’s fight against global warming.

In 2006, AB 32 came along and corralled these laws into a framework that gave an overall form to California’s climate-change strategy and set specific goals for reducing greenhouse gases.

Following the lead of the Kyoto Protocol 10 years earlier, AB 32’s target is to reduce California’s greenhouse-gas emissions to the same levels they were in 1990, by the year 2020.

CARB estimates the 1990 levels of greenhouse gases were about 427 million metric tons of CO2 equivalent—or 447 MMTCO2e, for short. This method of measuring heat-trapping greenhouse gases not only takes into account carbon dioxide, the most ubiquitous of the global-warming pollutants, but also tallies up the less common but more harmful greenhouse gases like methane, which has 21 times the heat-trapping power of CO2, and still more potent warming agents, like hydrofluorocarbons.

The total greenhouse-gas emissions inventory for California in 2006, the year AB 32 became law, was about 487 million metric tons. If the state doesn’t take significant action, the greenhouse-gas emissions will reach 600 million metric tons by the end of this decade. That means a reduction of 174 MMTCO2e is needed in the next 10 years, just to get California back to the state’s 1990 pollution levels.

To put that in perspective: All of the state’s cars and trucks, trains, planes and boats emit about 185 million metric tons of CO2 every year. So, if we were to completely stop going places or moving things, we’d be fine.

Instead, the Air Resources Board has written a “scoping plan” that includes 72 individual measures that will each do part of this enormous job.

Many of the measures are very small and obscure-sounding new regulations. Changing the chemicals used in fire extinguishers is worth the equivalent of about 100,000 tons of CO2; reducing the use of perfluorocarbons in semiconductor manufacturing gets you about double that.

Even some of the sexier, headline-grabbing programs only chip away at the problem. California’s vaunted $30-billion-plus high-speed rail system will reduce greenhouse-gas emissions by just 1 MMTCO2e—less than 1 percent of the reductions required under AB 32. The state’s Million Solar Roofs program is worth 2 MMTCO2e.

But there are a handful of big-ticket items that, when taken together, represent about 85 percent of California’s greenhouse-gas reduction goal. These include the state’s clean-car rules, the renewable-energy requirements for major utilities, and aggressive investment in energy-efficiency programs. The largest—and in many ways most uncertain and complex—program under AB 32 is called “cap-and-trade.”

Cap-and-trade—allowing big polluters to buy and sell pollution allowances—wasn’t part of the original AB 32 legislation. But the governor pushed for it early on in the implementation phase. “For the governor, I think cap-and-trade was a metaphor for being business-friendly,” said V. John White, a veteran environmental lobbyist and director of the Center for Energy Efficiency and Renewable Technologies.

Most of the parts of AB 32 rely on direct regulation of industry and products; cap-and-trade is all about letting the free market figure out how to reduce greenhouse gases.

The cap-and-trade system covers major industrial polluters, like oil refineries, electric utilities and cement plants. In all, 622 facilities around the state will be directly affected. It’s easy to get lost in the details of how cap-and-trade works, but Young suggests you remember this helpful metaphor: “It’s basically a game of musical chairs. You have to pay for your chair, and every year we take a couple of chairs away.”

At the beginning of the game, in 2012, a finite number of greenhouse-gas pollution permits will be issued to oil refineries, electric utilities, and other major polluters. Under one likely cap-and-trade scenario, each of those polluters would have to acquire pollution permits for all of the tons of pollutants they emit.

But in 2013, there will be fewer permits available, and in 2014, fewer still. That’s the “cap” part. And as the cap gets lower—the chairs are taken away—the price of carbon goes up, forcing businesses to get more and more innovative, and cleaner. Or so the theory goes.

Companies that are successful in making improvements to their plants, increasing efficiency, and reducing emissions will be able to get by with fewer carbon allowances. They can sell the remainder of their allowances to those other companies that are slower in adapting. That’s the “trade” part.

Things get more complicated with the introduction of “carbon offsets.” Under the rules currently being contemplated by the ARB, up to half of the greenhouse-gas emissions required by AB 32’s cap-and-trade program can be offset by purchasing credits from projects, companies, and organizations outside the “capped” industries, outside of the state, and even outside of the country.

The sellers of these carbon credits are companies or organizations that can show regulators they are doing something—through a new, cleaner manufacturing process, for example, or by protecting some natural resource—to take carbon out of the atmosphere. Timber farms in California, power generators run on methane from cow manure in India, hydroelectric dams in China—all could potentially sell carbon credits to California’s big polluters.

Critics say it’s very difficult to verify that these offsets will really happen. “What’s our assurance that you really won’t develop that land? How do we know that it was the offset payment that kept you from developing that land?” asked Bill Magavern, director of Sierra Club California. And carbon offsets do nothing to reduce other pollutants that often come with greenhouse gases—like smog-forming nitrogen oxides, ozone, and soot—in the communities where the polluting facilities are located.

“If you’re letting Chevron and Southern California Edison just buy cheap offsets, then they don’t have to innovate. And they’re not reducing the pollutants that hurt the people living downwind of those facilities,” said Magavern.

Proponents note that cap-and-trade was successfully used to solve the acid rain problem in the Northeast and upper Midwest and in Canada in the late 1990s.

Though it might seem hard to believe today, the program was promoted by Republican President George H. W. Bush and enjoyed broad bipartisan support, passing both houses of Congress by wide margins.

Compare that to the cap-and-trade system for CO2 being proposed now in the U.S. Congress. The so-called Waxman-Markey Act got only eight Republican votes in the House. And the recent election of a Republican to the Senate seat long held by liberal Democrat Ted Kennedy seems to have scuttled any prospect of cap-and-trade legislation at the federal level for now.

And the acid-rain program—which applied to one region of the country, and one nasty pollutant—was not nearly as complex as the cap-and-trade systems for carbon dioxide.

For a glimpse of what California may be getting into, look to the European Union, which for five years has been part of a cap-and-trade system administered by the United Nations.

According to investigative reporter Mark Schapiro (“Conning the Climate,” Harper’s, February 2010), cap-and-trade has become the largest commodity market in the world—growing to be worth about $150 billion in just five years. If the U.S. were to enter, the value could rocket to $2 trillion or $3 trillion.

And the European carbon trade has birthed an enormous secondary market in carbon credits that are bundled up and sold by carbon brokers with some familiar names: Goldman Sachs, Citibank and Bank of America, to name a few. Schapiro writes that the U.N. doesn’t have the ability to police the system effectively, and that CO2 reductions are often exaggerated and carbon prices are ripe for manipulation.

Assistant California Attorney General Ken Alex worries that the state will have similar trouble policing its own cap-and-trade system. In January, Alex testified before the California Senate Select Committee on Climate Change and noted that “billions of dollars of credits are likely to be traded if the market functions fully, with even more at stake if the California market is part of a Western United States market, a national market or even an international market.”

Bad market design, said Alex, is what led to the California energy crisis, and more recently to the mortgage and banking crisis. And similar financial gaming could undermine the efforts of California’s climate regulators. “An unchecked secondary market could adversely impact the price of allowances to a point that could frustrate the goals of the entire system.”

With the Wall Street bailouts and mortgage crisis still fresh in our minds, “It’s a challenging time to try to sell solutions that are rooted in markets and financial institutions,” admitted the EDF’s Walker.

But much of the mainstream environmental community, including the Sierra Club, the Union of Concerned Scientists, EDF, and the Natural Resources Defense Council, have all signed on to the idea of cap-and-trade.

The dangers are there, but supporters say a well-crafted, well-regulated plan will work. “We’re able to get the emissions reductions in the cheapest way possible,” said Peter Miller, chief scientist at the Natural Resources Defense Council.

So the debate has mostly moved to the question of how much pollution permits should cost. Business and environmental groups now are battling over whether pollution permits should be sold to polluters or given to them, at least at first, and at least for some industries.

Call these two options “cap-and-auction” or “cap-and-giveaway.”

Business groups argue that requiring manufacturers to pay for pollution permits amounts to a new tax on business. They also want much more freedom to make wide use of carbon offsets than is currently contemplated by the ARB.

On the other hand, if carbon pollution has no price, there’s much less incentive not to pollute. Companies pollute because it makes economic sense to do so. “These are valuable assets; why would we just give them away?” asked Bill Magavern.

Because of the complexities and the concerns about how to regulate the system, V. John White isn’t sure if it makes sense to embark on a cap-and-trade experiment now. “There are lots of other ways of getting those tons,” he said, adding that AB 32 has plenty of other working parts, many of which directly reduce pollution and more quickly spur investment in green technology. “We have a lot of other tools in the box.”

The average citizen is not going to invest much time trying to figure out how cap-and-trade works, or indeed whether it’s good policy. But a panel of experts, hired by the ARB to analyze how best to implement cap-and-trade, has come up with a good way to get the average Californian’s attention. Call it “cap-and-dividend.”

Under a recommendation from the ARB’s Economic and Allocation Advisory Committee, fees collected from industrial polluters would be sent to taxpayers as part of their tax rebate; or it would go directly into the general fund to keep other taxes low; or simply sent as an annual dividend check, the way Alaskan citizens get dividends from state oil excise taxes.

ARB figures it will collect between $2 billion and $22 billion a year. That would go a long way toward closing the state’s budget gap, or paying for a new energy-efficient flat-screen TV.

The economists at ARB surely don’t think of cap-and-dividend as a bribe, but it could help ease the way for the cap-and-trade program and for AB 32 generally, at a time when the public has other priorities.

In January, a poll by the Pew Research Center for the People & the Press ranked global warming dead last on a list of 20 priorities—behind concerns about trade policy and moral decline. At the top of the list: the economy, jobs and terrorism. Conservatives are playing on that economic uncertainty to try to dismantle California’s global-warming law before it gains steam.

“It would absolutely break the back of California business,” said Assemblyman Logue. He points to one study from Sacramento State, released in July 2009, that shows that when fully implemented AB 32 would cost the average household nearly $3,000 a year, and the average small business more than $40,000 a year.

Armed with the CSUS study, Logue last month introduced a bill to suspend AB 32 until unemployment dips to 5.5 percent. The legislation failed to move forward, and the study has since been dismissed by a number of economists. It doesn’t take into account the possible benefits of improved energy efficiency, for example, or the creation of new jobs in the green-tech sector.

“They total up all the costs they could think of and don’t count any of the benefits,” said the Sierra Club’s Magavern. The ARB’s own economic analysis shows AB 32 will actually have a small net positive impact on jobs. Another study, commissioned by the Union of Concerned Scientists, similarly found AB 32’s impact on small businesses would be “modest.” In one case study, researchers contend that AB 32 would cause the price of a $20 meal at one Southern California restaurant to rise by about 4 cents. And the ARB is working on another, much more thorough economic analysis due out in March.

“All of the credible studies show it’s a transition, not a disruption,” said Walker of the economic impacts of AB 32.

That’s not satisfying to Logue, who is now pushing a ballot measure to do what he failed to do in the statehouse. “My problem is that California is being asked to go it alone,” Logue said, making the argument that businesses will leave the state for less stringent regulatory environments. “We don’t think California should have to play by different rules than the rest of the country.”

He’s joined by conservative activist Ted Costa and Rep. Tom McClintock, and has gotten explicit support from gubernatorial candidate Steve Poizner.

While the group is promoting the measure under the catchy title “California Jobs Initiative,” California Attorney General Jerry Brown wasn’t buying it. His office gave the proposed initiative the following title and summary: “Suspends air pollution control laws requiring major polluters to report and reduce greenhouse gas emissions that cause global warming until unemployment drops below specified level for one full year.”

Initiative backers were furious about the stark language. Logue told the News & Review, “I believe that Mr. Brown was probably personally involved.”

But environmentalists were delighted. “The A.G. is just telling it like it is. This measure is a polluter’s dream and will kill a clean-energy economy for California,” said Steve Maviglio, a Democratic campaign consultant working for Californians for Clean Energy and Jobs, a group of environmental and business organizations that is already mobilizing to stop the Logue initiative.

Assuming AB 32 survives past November, its future is still uncertain in 2011. Both Republican front-runners in the race for governor have vowed to suspend the law right away. Both are claiming that California can’t afford AB 32 right now.

But the NRDC’s Peter Miller says California can’t do without AB 32 right now. “This is the path to economic development,” he said. “If we just sit back and keep buying stuff from China and Saudi Arabia, that’s not going to create any jobs.”

And by many accounts investment in clean energy took off in California in the two years following passage of AB 32. Everything has slowed down since then, but green tech is still the fastest-growing segment of the California economy. In some ways, AB 32, a framework for building a new economy, is a way for California to do impressive things again.

Walker said the old way of doing business didn’t do much for California’s economic health. Of the interests trying to stop AB 32, “We tried their approach,” he said. “That’s how we got where we are now.”