Arnold, Perata and The Future of Cap-and-Trade At the Air Resources Board

One of the biggest sticking points in the negotiations that led up to the passage of the landmark Global Warming Solutions Act (AB 32) was whether the goals to reducing greenhouse gas emissions were going to be accomplished through a cap and trade system. Governor Schwarzenegger favored that "market based approach", while the Democrats resisted codifying that into law. The compromise reached allowed that cap and trade was to be one potential solution, only after careful study by the California Air Resources Board (CARB).

Part of the recent dust up over the CARB was how it planned on addressing a potential cap and trade system. Arnold was twisting arms to insure that the CARB would take that approach and vowed that his next pick to head the board would support a cap and trade program.

Before I get ahead of myself here, I want to be clear about we are talking about. Cap and trade systems are basically emission trading programs. They encourage controlling pollution by providing economic incentives for reducing pollution emissions. Participating entities may trade carbon credits. Wikipedia is our friend:

In such a plan, a central authority (usually a government agency) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given credits or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduces greenhouse gasses at the lowest possible cost to society.

The environmental community is a bit split on the issue. Nunez has stated that he prefers the ARB meets the "emission-reduction goals with regulations and energy efficiency before a market system such as cap-and-trade is put into place." He is holding a hearing tomorrow on the governor's attempts to influence the ARB.

The Senate will take its turn investigating this issue when Arnold's pick for the new chairmanship of the ARB, Mary Nichols, comes up for her confirmation hearing. Perata writes letters, like this one to Arnold earlier this week:

As you know, you and I have not always agreed on the implementation of the state’s greenhouse gas law.

Specifically, I have taken issue with your preference for market-mechanisms – a.k.a., “cap and trade” – over strong regulation. Last October, I sent you the attached letter, opposing your broadly-drafted executive order directing the ARB to adopt market mechanisms concurrent with the adoption of regulations. I believed your executive order conflicted with AB 32. The law requires that the ARB adopt “early action” emission reduction regulations prior to the use of any market-based compliance mechanisms [Health and Safety Code Section 38560.5]. What’s more, AB 32 specifies that regulations are mandatory, while market-based mechanisms are elective – and, in fact, permitted only after extensive evaluation and a public process.

It's a little more wonky than the above, but you get the picture. There are some pretty high hurdles before a cap and trade system can be put into place under AB 32. Arnold has been working since day one to try and game the system. Trouble is that the language of AB 32 is pretty clear on the subject and it is what Arnold personally signed into law, following intense legilative negotiations.

As for Mary Nichols, she is getting widespread praise as an excellent choice for the chair of the ARB. However, note that she does have experience with running a cap and trade system, thus pleasing Arnold. AP:

Nichols said she supported market-based mechanisms as part of a broader effort that includes regulation. She said she already ran a cap-and-trade program on acid rain when she was at the U.S. Environmental Protection Agency.

"I think I can speak with some authority," she said. "It takes a strong regulatory backdrop. It takes good measurement and monitoring. It also takes a recognition that trading is just one tool. The key is the cap."

Expect Nichols to face some pointed questions by Perata about cap and trade during next week's hearing. He promised as much in the letter.

The Senate will determine the extent to which she is both knowledgeable about the law – and the law’s emphasis on strong regulation over market mechanisms – as well as independent, even if given a directive to take an action in conflict with AB 32.

We will establish a bona fide understanding of the law and its enforcement priorities.

The law is the law, not whatever Arnold says it is.