A Municipal View of Cap and Trade

by Joseph Kleinman

While at the federal level, climate change policy remains stalled as a result of partisan and ideological differences, state and local governments across the United States continue to advance legislation and policy study with the goal of reducing emissions of greenhouse gases. A variety of different mechanisms are in place, and others are planned, including incentives, mandates, and cap and trade programs. In fact, municipalities and local environmental agencies will face extraordinary political and administrative challenges to enact and verify reductions that may be mandated under law. With that responsibility, there is a potential to shape the outcome and benefits for their constituents that local governments would be wise to anticipate.

Without much media fanfare, the first mandatory market in the U.S. to auction allowances for CO2 emissions went into action on September 25, 2008. The Regional Greenhouse Gas Initiative (RGGI) is cap and trade for power generators in ten Northeast and Mid-Atlantic states. Regulated utilities producing more than 25 MW must purchase sufficient allowances to cover their emissions during a three-year compliance period. After five quarterly auctions, the market had raised $432.7 million for the ten states. In an exemplary preview of how a national cap and trade system might work, those funds have already been returned to the participating states through grants for weatherization and energy-efficiency programs that reduce CO2 as well as its key driver, energy demand.

Similarly, seven western states and four Canadian provinces have signed on to the Western Climate Initiative (WCI), an effort to register, manage, and establish a market-based system to achieve GHG reductions in their jurisdictions. The WCI takes a multi-sector approach, capping emissions from large industrial and commercial concerns, as well as power generators, starting in 2012. A second phase, starting in 2015, will broaden the caps to include fuel use for transportation, residential, and smaller industrial and commercial firms, to achieve a 15 percent reduction in emissions below 2005 levels by 2020. To moderate the impact of the program’s ambitious design, an undetermined number of allowances may be given away to regulated entities, a move that some critics claim will undermine progress toward the 2020 goal. The WCI grew out of earlier independent efforts by the member states to tackle global warming. In particular, California has been a national leader; in 2006, the state passed Assembly Bill 32, the Global Warming Solutions Act, still the most rigorous attempt to cap greenhouse gases broadly across a state’s industrial and economic activity. In essence, the WCI accord was modeled on the structure of AB 32 – a steady broadening of sectors that must purchase the allowances.

The Scoping Plan, prepared by the California Air Resources Board (ARB), that layed out an implementation guideline for AB 32, was widely anticipated when it was adopted in December of 2008. Truly visionary in scope, the plan requires a sophisticated accounting of GHG emissions. Past efforts to increase energy efficiency at the municipal level (for example by replacing incandescent bulbs in traffic lights with LED lighting) have often shown a positive return on investment. The Scoping Plan supports a statewide expansion of such programs, as well as stronger regulations for energy savings from building and appliance standards. The cap and trade element of the law is viewed as a key means for funding energy efficiency. Revenue from the sale of allowances may be directed as grants to fund local government actions to reduce emissions, or as envisioned in a recent proposal, roughly 75% of the revenue could be distributed to California households to meet or exceed any increase in energy costs attributable to the caps.

However, the cap and trade mechanism is not without its detractors. Reports now circulating in Washington suggest that the proposed federal cap and trade program is likely to be stripped from any bill that reaches the Senate floor this year. Political opposition in California is also taking shape. Republican politicians and conservative activists have launched a campaign for a November ballot measure to rollback the provisions of AB 32, and both Republican candidates for governor are hostile to the law. A July 2009 survey of public opinion on climate action in California indicated that although most residents (66%) still support the law, support has declined 7 points from July 2008 (73%) and 12 points from 2007 (78%). The survey, from the non-partisan Public Policy Institute of California, highlighted the political divide. An increasing number of Republicans question the influence of climate change, and by a large majority, they oppose the imposition of any cost to reduce its effects. Nevertheless, most Californians, even Republicans, believe that the government should regulate greenhouse gas emissions from power plants, cars and factories. The cap and trade program itself has a small margin of popular support among a plurality of residents.

Under the law, ARB is tasked with developing cap and trade regulation by the end of this year. Despite the uncertainty about its final form, the Scoping Plan forecasts dramatic economic benefits from the overall implementation of AB 32. Compared to continued business-as-usual policies, it would result in increased economic production of $33 billion for California, an increase in overall personal income of $16 billion, a per capita increase of $200, and an added 100,000 jobs, all by 2020. In combination with companion legislation SB 375, the Global Warming Solutions Act pledges the state to support a number of programs that promise considerable benefits for local governments – regional transportation planning, pollution reduction, water and energy demand reduction among others. Indeed, savvy local leaders, at the city and county level, should understand that getting involved early means that their concerns get heard, and that the benefits that best serve their constituents will be reflected in the regulations.

As noted before, large urban centers generally have been the state’s leaders in advancing climate change policy. Since the passage of AB 32, several surveys have been conducted to track the progress of local governments. In December 2009, researchers from the Lewis Center for Regional Policy Studies at UCLA released an investigation of the extent to which climate change action was reflected in the General Plans of California cities. General Plans are long-term guiding documents generated by a city or county planning department that are regularly updated. While many measures can be used to address climate issues, general planning represents a long-term, legal commitment to specific policies. Thus, it is significant that by 2009, 62 cities had updated their General Plans to incorporate climate change action. Additionally, over 120 California cities have already signed on to the U.S. Conference of Mayors Climate Protection Agreement.

This is not to understate the training, man-hours, and potential expense that many cities will face in order to comply with the legislation. Staffs in local governments have to understand the regulation, administer reporting, liaison with an alphabet soup of local and state agencies, assist officials in setting policies, and build consensus to reduce GHG emissions from future municipal operations. While revenue from the sale of allowances in a cap and trade system may be available to support local governments in these efforts, there are other mechanisms, some of which are currently being enacted across the state. For instance, municipalities may seek to allow property owners to finance renewable energy and energy efficiency projects through measured increases on their property tax bills. If successful, the energy costs savings of these projects would more than offset the increase in property tax. Such fiscal flexibility and ingenuity will be an important component of local government action.

According to Michael Schmitz, California Director of ICLEI – Local Governments for Sustainability USA, “What is key for local governments, now more than ever, is being able to justify policy actions based on quantifiable returns on investment.” Schmitz is talking about the hot-button issues – ensuring quantifiable, measurable, verifiable reductions of GHGs, and realizing energy savings. Founded in 1990 when more than 200 local governments from 43 countries convened at an inaugural conference in New York, ICLEI has recently turned GHG reduction strategy into a core mission. In cooperation with ARB and the California Climate Action Registry, ICLEI developed and is now promoting a software tool, Clean Air and Climate Protection version 2009 (CACP), specifically to standardize emissions measurement from local government operations.

Schmitz explains that the software, and the Local Government Operations Protocol on which it is based, intentionally target the initial action that municipalities must undertake – an emissions inventory. The protocol classifies emissions by government activity, or sector; buildings and facilities, electricity or district heating/cooling, vehicle fleet, street lighting and signals, water and wastewater treatment, waste, and employee commuting are among these. Of course, not all localities serve the same functions, so some won’t have emissions from all sectors. The CACP is designed as a user-friendly tool to allow local governments to do their best job of compliance, while taking the best strategies for monitoring operating emissions. Schmitz says the software makes available the “backroom planning” that allows local governments to save money and time in creating the inventory, and provides guidance for policy decisions to meet the emissions reductions requirements.

In practical terms though, municipal operations make up the smaller part of any community’s GHG output. The residential, multi-family, commercial and small industrial sectors represent a substantially larger share. However, local governments have limited authority, not to mention political will, to enforce reductions in these sectors. Consequently, those administrations that choose to, often act with utilities to support energy efficiency rebate programs, or adopt official language to encourage car-pooling and other transportation-related solutions. Unfortunately, such voluntary measures generally do very little to address California’s largest single source of GHGs, vehicle emissions. As a remedy for this situation, Senate Bill 375 was passed, the first law in the country to attempt to control GHGs through land use and transportation-oriented development policies.

SB 375 empowers the Air Resources Board to set targets for reductions from cars and light trucks. The intended aim is to decrease the growth of vehicle miles traveled, or VMTs, in the new acronym parlance. Municipalities are regulated through federally designated metropolitan planning regions (there are 18 of these that comprise the entire geographical area of the state), which must make a best effort to apply ‘smart growth’ strategies to urban development. The trick here is that the regions have no power to impel such strategies; land use decisions reside entirely with local governments, whose housing and transportation plans may not fit with the policies promoted under the law. The benefit offered by the state is that local developments, which meet the law’s standards, will face less stringent reporting requirements under the state’s environmental quality act, or CEQA.

There is a general understanding that the imposition of emissions caps will cause energy prices to rise, probably before 2012. As the first point of contact for government services, cities and counties can expect to hear early and often from consumers groups, and the public at large, when the impact begins to be felt. There is hopeful news, though, in recent developments in the Air Resources Board’s deliberations. A key committee, formed by the Governor and ARB, to render recommendations for the cap and trade program, came out in support of the 100% auction of allowances, which, when sold, could net hundreds of millions of dollars annually. Mike McCormick, who assisted the Local Government Sustainable Energy Coalition in lobbying the committee in the interest of local governments, says,  “Even if they don’t go for 100% auction, it is very possible, it is very likely, in fact, that auctioning of allowances will be a component of the cap and trade program.”

McCormick and Howard Choy, chair of the LGSEC, argued to committee members that many local governments have already taken actions to limit emissions. So when revenue is generated from allowance sales, it should go to support and enhance those programs that have proven results. The energy efficiency and clean energy initiatives underway in many communities have a measurable impact, and if expanded, may be the fastest, cheapest way to bring down energy demand and prices. Even in those cities and towns where GHG policies are not as advanced, local governments may be able to seek allowance funds to conduct emissions inventories, and take other steps to come into compliance with state regulation.

California’s past success with clean air programs, energy efficiency, and renewable energy is a hallmark of its worldwide reputation for innovative environmental policy. AB 32 and SB 375 fit squarely in the tradition of advancing sustainability that Californians, by a consistent majority, support. Still, the broad scope of these laws will demand a high degree of coordination, and outreach, from officials at all levels of state and local government. Only then will the people and businesses of California realize the benefits of being in the forefront of climate change action.

Joseph Kleinman is a veteran journalist in multiple media. He won Emmys® with ABC News in the 1980s, and awards for entertainment and documentary projects with HBO and Disney in the 1990s. Since 2003, he has also worked as a media consultant for renewable energy pioneer, Energy Conversion Devices, and as a business strategist for the bioenergy firm, FlexEnergy LLC. His articles on the new face of energy have appeared in Renewable Energy World and Currents.