Navigant Research Blog

In Election’s Wake, California Launches Cap and Trade

Peter Asmus — November 27, 2012

Now that the 2012 presidential elections are well behind us, investors and developers with their sights on clean energy technology markets are settling down to figure out the regulatory and policy landscape moving forward into 2013.  As always, California could provide a glimpse of the future for much of the rest of the country.

In the election’s aftermath, the launch of the nation’s first “cap and trade” auction – occurring in California – seems serendipitous.  The auction is one of many programs helping to implementing the state’s 2006 landmark AB 32 law, also known as the Global Warming Solutions Act.  Will this market-based attempt to price carbon become a precursor for the rest of the country, or will it fall flat and give Republicans a political edge in the 2014 midterm elections?

Put another way, given the still fragile state of today’s economy, is now the time to impose a de facto tax on carbon?

If one listens to the California Chamber of Commerce, the answer is no.  Interestingly, the state Chamber actually endorses taking action to respond to climate change.  But this business advocacy group has filed a lawsuit taking issue with provisions of the law that require businesses to divert a portion of auction revenues to fund state programs.  Ironically enough, the California Public Utilities Commission is now proposing that a portion of these same revenues be rebated back to residential consumers, echoing the theories of “cap and dividend” first floated by Peter Barnes in his 2003 book, Who Owns the Sky? Early auction results showed a low carbon price of $10.09 per ton, a result of competing bids that sold out and an auction design that awards allowances on the lowest clearing price.

The results of these policy debates in California may influence the fate of the federal production tax credit (PTC) for wind power, a policy that clearly was caught in the crossfire of election-year politics.  The stop and go nature of policy support for renewables in the United States is costing the nation jobs, as several factories have laid off staff, and the American Wind Energy Association claiming that 37,000 new jobs hang in the balance.

Rumor has it that one “grand bargain” that may appeal across both sides of the aisle might be a longer extension of the current PTC for wind of around $0.02 per kilowatt-hour (3 to 5 years) in exchange for a final sunset on the subsidy (or a decline in the subsidy rate over time).  The rationale is that both wind and solar are now dropping in cost, and therefore “permanent” subsidies should not be necessary.  This may all be wishful thinking, however, as record low natural gas prices have made it more difficult for renewables to compete.  The renewable energy lobby also points out that fossil and nuclear technologies have received government assistance for decades, and could still balk at such compromises.

In any case, the election results, and the launch of the nation’s most advanced carbon reduction market, will likely prove to be fertile ground for new policy reform next spring.  And California’s cap and trade program could reveal some populist twists that will influence decisions made in Washington, D.C.

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