(January 14, 2010) A state agency’s preliminary draft for a cap-and-trade program to reduce greenhouse gas emissions omits controversial elements that are critical to determining whether the program can succeed or be cost effective, according to the California Chamber of Commerce.

In a letter to California Air Resources Board (ARB) Chairman Mary Nichols, the CalChamber emphasized the importance of decisions on how greenhouse gas (carbon) allowances will be distributed, whether and how businesses can offset emissions at one site with reduced emissions at another, and linking California’s program with future national and international ones.

Those issues will be critical to the overall success of the cap-and-trade program and whether California can cost-effectively meet the greenhouse gas reduction goals required by the state’s climate change law, AB 32, the CalChamber said.

The CalChamber recommended that:

• Auctioning of greenhouse gas allowances be kept to a minimum because of the significant costs a 100 percent auction system would impose on California businesses and consumers. The CalChamber noted that ARB’s Economic and Allocation Advisory Committee has estimated California businesses would have to pay $143 billion between 2012 and 2020 just to continue operating in the state if allowance prices reach $60 per ton by 2020 in a 100 percent auction system. A thorough economic analysis is needed before the ARB considers final adoption of a rule, the CalChamber said.
• The CalChamber also strongly suggested that an auction system or other revenue-raising mechanism would be contrary to the legislative intent of AB 32. A letter by the author of the legislation states that the intent of AB 32 is for any revenues raised to be used only for direct administrative costs. Accordingly, the CalChamber does not believe ARB has the legal authority to adopt revenues beyond a reasonable charge for administrative activities.
• The state avoid taking a California-only approach to drafting its new program and instead allow for “seamless linkages with other national and international programs from the outset.”
• The program allow a broader use of offsets than the 4 percent limit detailed in the preliminary draft rule. Real, verifiable offsets should not be limited geographically. Research has shown that maximizing the use of offsets would be one of the most effective tools for reducing program costs while achieving AB 32’s greenhouse gas reduction goals, the CalChamber noted.
• ARB analyze the potential economic impacts of bringing transportation fuels into the cap-and-trade program before developing regulations to speed the timeline for including fuels.  Sticking with the 2015 timeline for including transportation fuels and natural gas in the program allows California time to transition the cap and trade program to include fuels, the CalChamber wrote.

Staff Contact: Brenda Coleman