California Climate Deal Could Net Big Bucks for Polluters

This article was originally published on CALmatters, a nonpartisan, nonprofit journalism venture dedicated to explaining California policies and politics. Learn more about CALmatters here.

Against the sparkling backdrop of sailboats bobbing on San Francisco Bay, Gov. Jerry Brown last month signed a bill extending California’s cap-and-trade program, assuring that the most high-profile piece of the state’s fight against climate change persists for another decade.

In a Sacramento hearing room two days later, the California Air Resources Board approved a paragraph, tucked within a 17-page resolution, that will likely result in benefits worth hundreds of millions of dollars for the oil and agriculture industries. It was the first domino to visibly fall as a consequence of behind-the-scenes dealmaking that produced a cap-and-trade program acceptable to both key environmental groups and major polluters.

The air board’s generous impulse toward those polluters was an abrupt reversal of previous plans, ran counter to staff recommendations, and left at least one confused board member later saying he wished he had abstained from voting.

Although the board’s move was not written into the cap-and-trade legislation Brown signed, the bill’s author acknowledged it was a necessary concession in the scramble to secure its cliffhanger passage in the Legislature. Cap and trade, which lawmakers extended until 2030 with a bipartisan vote, is supposed to help California slow global warming by forcing industry to either operate more cleanly or pay to pollute.

“It was part of the deal to make sure we could get a (two-thirds) vote to extend the cap and trade program,” Democratic Assemblyman Eduardo Garcia of Coachella told CALmatters. “Without a doubt, it’s a compromise in order to reach the greater goal, and at the same time, to put forward what would be the nation’s strongest air quality policies that you could ever see.”

The deal would provide maximum compensation to companies for the extra cost of doing business in a state with the nation’s toughest emissions standards. But some critics say it merely gives a lucrative financial leg-up to polluting firms that don’t need it—and by removing some of those firms’ incentives to reduce greenhouse gas emissions, could even undermine cap and trade’s prime goal.

The complex program, which took effect in 2013, illustrates the delicate balancing act California is trying to pull off as it works to lead the world in aggressively combating climate change while simultaneously fostering a robust economy.

Here’s how it works: California sets a steadily-decreasing “cap” on greenhouse gas emissions each year, and sells major businesses permits, known as allowances, allowing them to pollute. To ease the burden on industry, the state also gives many permits away for free. That allocation is determined by a complicated formula that depends, in part, on how likely the companies are to flee the state if regulations become too financially burdensome.

The air board has grouped businesses into three categories based on whether they are at high-, medium- or low-risk of moving out of state. Each category is assigned an “industry assistance factor” that plays into the formula for free allowances.

High-risk industries such as oil and gas producers are guaranteed 100 percent assistance in perpetuity. The two other categories have been receiving maximum assistance since 2013, but that was scheduled to drop next year.

That meant hundreds of businesses—primarily oil refineries, but also fruit and vegetable canneries, large wineries and breweries, plaster and stucco manufacturers, and assorted other smokestack industries—were slated to receive fewer free allowances for three years.

The system was designed to be generous in the early years of the program, but as businesses adjusted, the state intended to wean companies off the allowances. In recent years the air board staff has even recommended dropping below the 75 and 50 percent reductions scheduled to take effect next year.

But each time the board considered peeling away some of the allowances, California businesses have fought back with chilling declarations of financial ruin.

At the July meeting, the board unanimously passed a resolution asking staff to produce a regulation change that would keep all California’s covered industries at the 100 percent assistance rate. It will make a final decision later, although dozens of lobbyists at the meeting lined up to offer their thanks as if it were a done deal.

The air board’s move would ensure industry the maximum assistance through 2020. The cap-and-trade bill then guarantees it through from 2021 to 2030. The upshot: California will have bestowed the biggest possible financial cushion to every polluter in the state for the entirety of cap and trade’s existence.

Gov. Brown’s office referred reporters’ questions to the air board, which is part of his administration. The board chair—a Brown appointee—said she was not privy to legislators’ deals. She noted that the board frequently adjusts any number of aspects of the regulations and that focusing on which companies got which allowances misses the larger point.

“From my perspective, my eye is on the ball—it’s a long ball,” said Mary Nichols. She added that the agency is focused on running a market-based program that is “calm and well managed.”

There was much that was unusual about the agency’s recent meeting. The actual resolution the board considered, as well as the staff’s discussion, was not publically available prior to the meeting. In fact, the proposal and affiliated documents were not posted on the air board’s website until a week after the vote.

One board member said that during the meeting there was confusion about what the panel was voting on, and called the process rushed and sloppy.

“If I knew I would have asked, ‘Is the assistance factor going from 75 percent to 100?’,” said Dean Florez, a former state senator who now sits on the air board. “I don’t know if everyone knew that that’s what they were voting on.”

Florez said if he were voting on the resolution today he would abstain.

Since the board’s vote last month, a leading energy economist has determined that extending the higher rate of industry assistance for three years would amount to a $300 million benefit to oil refineries. The boon to other emitters—such as food processors and aerospace manufacturers—would likely come to tens of millions of dollars.

“If the Legislature comes in and says, ‘We don’t care what experts say about allocations, we still want to give away more,’ that’s a political decision and that’s a big part of the politics of (the cap and trade bill),” said Danny Cullenward, who works at Near Zero, a climate policy think tank at Carnegie Institution and teaches at Stanford’s law school.

“But this is specifically going against what, at least as of a couple of months ago, was what the air board said was the right way to approach this.”

The industry assistance program was created to acknowledge that the cost of complying with state rules might place some companies at a competitive disadvantage. In some cases, as with utilities, the free allocations were meant to protect ratepayers from sticker shock.

Businesses say the program helps them keep prices lower for consumers while maintaining jobs in California. Cathy Reheis-Boyd, president of the Western States Petroleum Association, said that without free permits to emit greenhouse gases, oil refineries could find it too expensive to do business in California—accelerating a trend that’s already seen the number of refineries in the state drop 50 percent since 1985.

“There’s been a decline in the number of refineries over time due to increasing costs and the difficulty of managing that,” Reheis-Boyd said.

Dorothy Rothrock, president of the California Manufacturers & Technology Association, contended that the air board bears the burden of proof to demonstrate that its policies are not harming business. In her view, they are.

Compare investment rates in manufacturing in California to the rest of the country, she said, and the results are “pathetic. It’s really alarming. California is sucking wind.”

It is sometimes difficult to square businesses’ dire depiction of a gasping industrial sector with the governor’s insistence that California’s climate policies have not been a drag on the state’s robust economic engine.

Florez, at least, said he wants companies to show their work. “Prove why 75 percent is not working,” he said. “I would like people to prove to me that they are leaving. Prove that this would be so onerous that you will leave the state.”

Business officials seldom provide studies or specifics to make their case, saying disclosing that information equates to revealing trade secrets. For the most part, the board has been sympathetic to industry’s needs, having once before cancelled a scheduled drop in cap-and-trade’s assistance to industry.

But economist Stephen Levy said the economic impact of strict emissions rules is actually negligible. “You create some jobs, some jobs are lost. The numbers are miniscule,” said Levy, director of the Center for Continuing Study of the California Economy, a private economic research firm.

On the issue of businesses leaving California, he was skeptical. “Are they saying they are leaving because of air quality rules or because the CEO wants to live somewhere else?” Levy said. “Leaving doesn’t always mean ‘leaving because of the regulations.”

Still, business complaints loomed large as state leaders debated cap and trade this spring. The program was set to expire in 2020 and Brown—positioning himself as the environmental antithesis of Republican President Donald Trump—was determined to sign a law extending it for another decade. He wanted a deal that could pass with a two-thirds supermajority to protect cap and trade from further legal challenges.

That meant walking a political tightrope. Though Democrats have a supermajority in the Legislature, some were not going to support cap and trade—either as progressives who see the program as too business-friendly, or as moderates who fear angering conservative voters in swing districts. Republicans also were divided on the bill.

Given the stakes, a powerful coalition of industry groups spent millions lobbying to shape the cap-and-trade extension, and then threw its weight behind the final bill. Securing the continuation of free allowances between 2021 and 2030 was a key item on industry’s wish list—and was included in the version of the bill Brown signed at the ceremony overlooking San Francisco Bay.

Assemblywoman Monique Limon of Santa Barbara, one of three Democrats who voted against the bill, said she was concerned the free allowances, coupled with other provisions, could weaken the environmental power of cap and trade, and ultimately hamper the state’s ability to reach its goal of reducing greenhouse gas emissions by 40 percent by 2030.

“In the end, my vote reflected that I didn’t have the evidence I needed to…believe we will successfully get there,” Limon said.

Assemblyman Jim Cooper, a business-friendly Democrat from Elk Grove who voted to extend cap and trade, said maintaining the free allowances was important to him because it keeps costs down for the agricultural interests in his Central Valley district that are facing global competition.

“I’m looking at it at the 30,000-foot level,” Cooper said. “Do we want to drive our dairy herds out of California?”

But the lawmakers’ debate over the appropriate rate of industry assistance in the cap-and-trade extension addressed how the program will operate from 2021 to 2030. The law Brown signed doesn’t say anything about industry assistance before then.

Instead, that appears to have been worked out in an agreement that’s left little in the way of a paper trail or explanation.

Garcia, who has a non-voting seat on the air board, said politicians had to agree to grant the free allowances—before 2021 and after—in order to get enough votes for his bill to pass. And, he said, because lawmakers also approved a companion bill to better monitor air quality in industrial neighborhoods, he feels confident that the end result is good for Californians.

How cap-and-trade gets implemented will help determine whether the state has a shot at reaching its 2030 climate targets “an ambitious accomplishment that most people believe (the cap-and-trade extension) has just delivered,” said Cullenward, the economist. He noted that a $300 million “transfer of wealth from the general public to a special interest is a notable development, but I’m not claiming this particular episode will make or break the whole cap-and-trade program.”

If regulators take the same industry-friendly approach to the rest of its cap-and-trade operations, he added, “it will.”