California's landmark cap-and-trade program for curbing greenhouse-gas (GHG) emissions faces new uncertainty due to a recent California Superior Court decision. It is very likely that cap and trade ultimately will be implemented in a form similar to its current design, but implementation could be delayed.
A program delay would harm the wind industry economically by deferring anticipated program benefits. However, as long as the delay is short and the long-term prospects for the cap-and-trade program are not in question, the damage should be limited.
The court's decision arose from a lawsuit filed by the Association of Irritated Residents and several other environmental organizations that object to the California Air Resources Board's (CARB) implementation of the GHG regulation mandate established by the state's A.B.32 legislation.
The lawsuit does not contest the basic concept of GHG regulation or CARB's authority to regulate GHG emissions. The environmental groups object to CARB's reliance on a cap-and-trade market to achieve a significant proportion of the required GHG emissions reductions, preferring direct emissions-reduction measures instead. Direct measures ensure local pollution reductions in low-income communities that house industrial facilities, whereas market mechanisms provide facilities the option to purchase carbon allowances in lieu of reducing their emissions.
Wind energy providers that sell power into California will benefit from any GHG-reduction program that increases the cost to produce or sell fossil-fueled power in the state (see ‘How California's Emissions Program Can Benefit Wind’ in the April 2011 edition of North American Windpower).
The benefits to wind providers may be greater under a program of direct emissions-reductions requirements than under a cap-and-trade market, because direct ‘command and control’ requirements are theoretically less efficient than market mechanisms, resulting in a higher effective price of carbon emissions. In practice, however, the level of benefit to wind providers is likely to depend more on the details of the regulatory program than on the overall program structure.
The key consideration that this lawsuit raises for the wind industry is therefore not the structure of the GHG regulations, but the timing. A delay in implementing the cap-and-trade program would hurt the industry by deferring the benefits that are expected to arise from putting a price on GHG emissions.
Such a delay is possible; the court ordered CARB to stop implementing its GHG-reduction programs until it comes into compliance on two accounts: expanding the discussion of alternatives to the cap-and-trade program in its environmental impact assessment, and resolving a procedural matter related to the timing of the adoption of its GHG-reduction programs.
Any delay is likely to be short in nature, because the court decision found fault only with CARB's procedural steps for implementing A.B.32. Moreover, CARB is planning a legal appeal to try to overturn the decision and may request a stay of the decision pending that appeal. If the decision is upheld, it is unclear whether it will ultimately require changes to the GHG-reduction programs, which would likely involve a longer delay, or simply additional procedural steps to demonstrate that the cap-and-trade program was properly selected.
CARB is downplaying the implications of the ruling and stating that program implementation should remain on schedule. CARB anticipates that an extensive environmental analysis it has already conducted should address the court's major concerns and appears to believe that it can comply with the court's orders without making significant program changes. This may be a reasonable assumption given that the court did not object to any of the program elements.
However, whether the process will delay implementation of the cap-and-trade program appears less certain than CARB's declarations imply. CARB's current schedule plans for the cap-and-trade regulations to be finalized this fall to prepare for implementation at the start of 2012. If CARB is unable to meet the court's requirements or have the ruling stayed or overturned by this fall, a program delay should be anticipated.
The Association of Irritated Residents' contentions primarily concern the cap-and-trade program. However, the lawsuit encompasses all of CARB's GHG-reduction plans. The decision suspending implementation of the cap-and-trade program suspends all of these plans. Among the plans are the state's 33% by 2020 renewable portfolio standard (RPS) that is driving the sales of renewable energy to California utilities. Should the future of the renewable procurement requirement be put into question, it could have a chilling effect on California's renewable energy market.
However, this is not a likely result. CARB is expected to request that the court decision be narrowed to halt implementation of only the cap-and-trade program and not the other GHG-reduction measures. If this fails, temporary delays in implementing the program may ensue, but these delays are unlikely to last long enough to materially affect the program, because the procurement requirements do not begin until 2020.
Moreover, California S.B.X1 2, if passed and signed into law, would independently institute a 33% by 2020 RPS. As of March 25, S.B.X1 2 had passed the California Senate and several Assembly committees and was being heard in the California Assembly.
Gov. Jerry Brown, D-Calif., has expressed support for renewable procurement standards and is expected to sign the bill should it pass the Assembly. Any delay or changes to CARB's 33% by 2020 program that occur would be immaterial if S.B.X1 2 became law, because the legislative program would preempt CARB's program.
For all of these reasons, demand for renewable energy in California is not likely to be materially affected by this decision. The decision, however, may temporarily delay benefits that renewable energy providers were anticipating from the cap-and-trade market.
Laura Norin is a senior project manager at MRW & Associates LLC in Oakland, Calif.
