Impacts of California's 'Cap And Trade'

CAVANAUGH: I'm Maureen Cavanaugh, it's Thursday, June†7th. Our top story on Midday Edition is about a program that's about to kick in for California businesses that may have a big impact on our environment and probably on our pocketbooks. It's California's own version of cap and trade to reduce greenhouse gas emissions. Joining us to talk about this environmental program in California is my guest, Jim Waring CEO and president of clean tech San Diego. Welcome to the show. WARING: My pleasure to be here. CAVANAUGH: I think a lot of people have heard of cap and trade. But they might not really be able to explain what it is. Could you explain the basic concept? WARING: Sure. Cap means the maximum amount of credits, the maximum amount of CO2 that the covered companies may net. Think of that as the ceiling. Then the way the trade concept works is that if someone uses less than the max, less than their allocated maximum, that is an asset that they may trade, in other words sell. And the concept there is that this amount that you can trade, this asset you can create by using -- emitting less CO2 than you're allocated allows you to sell and derive revenue. So that's the trade portion. CAVANAUGH: So if my industry has a cap of 50 emission credits, and I use 48 of them, I'm allowed the other 2 to some other business that's a little bit dirtier than I am? WARING: That is correct. That's a good way to summarize it. CAVANAUGH: Okay. Now, what is this supposed to do to stop air pollution or ease climate change if you can sort of -- you know, trade this level of pollution so that somebody else can pollute a little bit more? How does it actually help climate change? WARING: Well, first of all, we have to remember that the cap and trade provision is part of AB32, which was law enacted in California in 2006. For each year between the first year, are 2013, and 2020, the amount of emissions is that a covered entity is allowed goes down. It goes down 2% each year for the first three year, then 3% each year. So the total amount of emissions will decrease, and companies will be incent vised to be more efficient so they do not have to spend the money to get the allowances. CAVANAUGH: Do other countries have programs like this? WARING: Yes, the biggest area that has a cap and trade program is the European union. And it's been on their books for some time, and it is now just starting to be implemented. So think of all the countries of the EU. Australia has a program, Japan has a program, South Korea has a program, and New Zealand has a program. Even China is studying cap is trade. CAVANAUGH: Have any of these programs been implemented long enough so we know whether or not they are working? WARING: I don't think so. I think it's all very new. The real key to this is the cost and the benefit. One of the underlying theories is that is there an opportunity for an entity to reduce its carbon impacts by being more efficient. And by having this incentive or penalty, companies will adopt that. That is the indication. There are examples. But if you're asking at a national level or an EU level, not yet. CAVANAUGH: What examples do we have? WARING: Well, a perfect example is Siemens, which is a major German firm. The CEO said to his staff that he wanted, not because of cap and trade, but because he believed a duty to reduce carbon that he wanted their factories to reduce their carbon impact by 20%. They were very proud of the fact that bying more efficient with how they use energy, that they were able and how they run systems, that they were able to reduce their impacts. So there are examples. CAVANAUGH: Now, California is I believe the first state to make cap and trade a reality. WARING: The only state. CAVANAUGH: The only state. When does it actually begin? 2013 is when it will begin for the first group of companies. And we have to keep in mind that this only applies to what's called large emitters. And large emitters are defined as enterprises that emit more than 25,000†metric tons of CO2 equivalents. To put that in perspective, what does that mean? You can't really see this stuff of the the average home emits 20†metric tons, to give you an idea. The average family of four, 20†metric tons. The covered companies in California are 25,000†metric tons. So you can see the concept of the program is to just go after large emitters, and very close to the source of the creation of the emissions. CAVANAUGH: Let me go to the phones, because Dodla has called in from Encinitas with a question for you. Welcome to the program. NEW SPEAKER: Thanks so much, Maureen. Thanks for taking up this important topic. I help people build green buildings and operate buildings, so I'm very concerned about energy efficiency and the cost of energy. I'm wondering two things. Cap and trade, it's a very complicated matter to actually verify that one entity is actually reducing carbon emissions while another one hasn't, like if your off set is in some place like Brazil, and they're going to plant trees that they may have planted anyway, or they said they did and they didn't. So how do you verify something? Why can't you go with a simple carbon dividend and let the markets figure it out? CAVANAUGH: Good question. WARING: The caller raises a number of questions. First of all, the idea of off set credits, that means that say I'm a covered company and I want to use the example of the caller, buy a rain forest in Brazil, which absorbs CO2, and say I want a credit for that. I happen to believe that credits are a good idea. But the caller is right, they're very hard to verify. So in California, are the geographic area where you can buy credits and very limited. I couldn't go to Brazil. CAVANAUGH: You'd have to be here in California? WARING: I think it's limited to the U.S. but it's very precise. Also it's limited to only 8%. That's the most you can do. And the idea again is to have a system that can be verified. Because verification is very hard. When I speak to companies that are covered, they worry about the potential cost of compliance, of actually handling the CO2 levels. But they also worry about the administrative cost of compliance. And there are protocols that the California air resources board, which is responsible for administering the program is working on those protocols. Now, as for other options, there are all kinds of ways to do this. We could tax carbon, which a lot of people think is easier. This just happens to be the protocol that was adopted by our state. CAVANAUGH: The caller mentioned that this is a rather complicated plan. One part of it that goes into effect is a carbon allowance auction. And I must say I read a couple of paragraphs about that, and my mind begin to spin. What is that auction that's going to take place in November of this year? WARING: The auction allows, if I have a credit that I am not going to use, I can sell that credit. Also, and this is where a lot of controversy has come in, are the State of California holds a lot of credits that it will be selling. You've heard talk about the billion dollars or billion.5 million dollars, that money will come from the state selling credits. This is very complicated. And I will say that CARB is working very, very hard to not have the program be a failure. CAVANAUGH: And that's the air resources board. WARING: They're working very hard because this is complex. And as you said, no state has done it before. So they're trying to adopt best practices. Initially, most emitters, covered emitters, will receive free allowances equal to their 2012 emissions. So that means that they won't have the financial burden of buying all of those credits. But as I mentioned earlier, your allowance will go down each year. So unless you become more efficient, in order to do business as usual, you're going to have to buycredits. And that's where the auction comes into play. CAVANAUGH: And the state has some credits that it's going to sell, and they're thinking of making up to a billion dollars in that auction. What will that money be used for? WARING: Needless to say, that's very controversial. My own opinion is that -- and it's being debated, both at the CARB level which is trying to get input from a large number of constituencies. There is a law that the assembly passed that generally says the money has to be spent for matters that reduce greenhouse gas emissions. That can be all the way from energy credit programs to cleaner vehicles. It's very broad. But my personal opinion is that, remember, this came out of AB32. And the goal of AB32 is to have the State of California, by the year 2020, be emitting the same amount of carbon we emitted in 1990. We should take whatever proceeds that come from this program, which is part of that overall goal that we voted for and apply it to programs that will help achieve that. Again, energy efficiency certainly comes to mind. Renewable energy programs come to mind. CAVANAUGH: Cap and trade, it's kicking in here, but it's still a political football nationally. Many conservatives are staunchly opposed to this idea. What are the down sides to the cap and trade idea? WARING: The down sides are as follows. And this is why it's hard for any one state to do this. If I am a company that is covered by this, and I am manufacturing in California and I need to expand my manufacturing, will I expand in California or will I go to a state that doesn't have the same restrictions? That's called leakage. And to a large extent, the free credits the state has to give is is to protect against that. The other thing is just the cost of administering the program. So will there be another bureaucracy? And there's a lot of legitimate concern with that. When California in 2006 was thinking of the program, there was an expectation that there would be 8-10 western states and several provinces of Canada that would be coming together to form a broader network to make it a more universal program. And for various reasons, in the intervening six years, the only partner we have is the province of Quebec. CAVANAUGH: I see. WARING: The others have dropped away. So it's a genuine concern that we do this gently with the goals in mind, and not make it punitive, and not make it prohibitive. CAVANAUGH: If a business did -- industry, a very large emitter did exceed its cap, and would have to maybe buy some credit emissions from someone else in the market, could that conceivably push up prices for consumers? WARING: Yes. Any cost that a business incurs will impact prices. And that's again one of the reasons why the state is giving away, it's important to note, the credits initially. And the theory is that applying technologies, are the companies will be able not to actually increase costs but decrease cost of operations by applying technologies that will have a consequence of reducing their emissions. And I can say from our work at clean tech, there are so many exciting new ways to do things, ways to use electricity, ways to run buildings, ways to run your vehicle fleets. There are so many things that people can do to reduce the carbon that the theory works. By and large, that you can just like my Siemens example, you can on a bottom line focused basis as a business reduce your carbon and save money at the same time. CAVANAUGH: My last question to you, what businesses in San Diego are going to be most affected by this? WARING: What's called large emitters, and that's that 25,000†metric tons. So some names that your listeners would be familiar with, Qualcomm, solar turbines, our two largest universities, genet tech. But think of it as your major companies but more importantly your power produces, SDG&E has to be mentioned in that, and Sempra, because they produce power would be our largest emitters by definition because of what they do in their business. So they're covered as an example. And power produces up and down the state are covered. CAVANAUGH: And as you say, in these very beginning stages, with California outdoing this by itself basically, the fundamental part of this is to encourage people to think about how they're doing their business and just get cleaner because it's going to pay off for them in the long run. WARING: Absolutely. And it's so important to remember that there is a lot of low hanging fruits. Companies have learned it's in their economic interest to operate in a way that reduces their energy use and carbon footprint. There is that economic incentive that we have many examples of in our community and country that are being used by people every day. CAVANAUGH: It's a very complicated subject, and you explained it so well. I want to thank you for that. WARING: Thank you. CAVANAUGH: Jim wearing, CEO and president of clean tech, San Diego.