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The report noted that many in the industry favor free allocations, as a way of reducing the costs of complying with carbon dioxide reductions. But discouraged that approach, warning of potential excessive profits and noting the "overly generous" allocations under the first phases of Europe's trading system. 

With electric power generation responsible for about 40 percent of the nation's carbon dioxide emissions, or about 2.7 billion tons annually, according to the report, the industry has a big stake in the outcome of any legislation.

The issue is not confined to the federal level. In states such as California, which is contemplating a cap-and-trade program to help the state meet the demands of its groundbreaking AB 32, regulators are also wrestling with the subject. California officials are expected to make a recommendation on the allocation question this summer (see Climate Law Update story here).    

Under Lieberman-Warner, credits covering about 45 percent of the emissions would be distributed for free in 2012, according to the report, while another 573 million tons worth would be handed out to distribution companies. Those allowances would then be auctioned off to raise money for energy efficiency programs or to provide customer rebates. The Bingaman-Specter bill, on the other hand, would provide about 80 percent of the allowances for free in 2012.

At a hypothetical value of $10 a ton -- no one really yet knows how much the credits would be worth -- the value of the free credits allocated to the 100 largest utilities under the Lieberman-Warner approach would be about $10.4 billion. That comparable figure under the competing measure would be more than $18 billion.

Restricting the amount of free credits is clearly favored by at least one sponsor of the report, the Natural Resources Defense Council. In a statement accompanying the release of the assessment, Dan Lashof, science director of the environmental group's climate center said (see full text of statement here):

"Billions of dollars in allowances are at stake under the proposals to cap and reduce global warming pollution. The value of pollution allowances should benefit consumers and smart programs that deliver real pollution reductions, not polluters." 

Along with the NRDC, the report was sponsored by Ceres, a coalition of investors and environmental groups, as well as two utilities, Pacific Gas and Electric Company and Public Service Enterprise Group of New Jersey.

The report also shows stark differences between utilities based on whether credits are distributed based on the utility's emissions, or its electricity output. The emissions-based method would "penalize companies that have invested in low- and zero-carbon technologies in advance of the cap-and-trade program," the report noted.

Under an emissions scenario, the Southern Company, described by the Wall Street Journal's online site Environmental Capital as "coal heavy," would get $600 million in credits under the proportions outlined under the Lieberman-Warner bill, as opposed to $734 million if the allowances were doled out based on emissions.

For a company such as Northern California's PG&E, reliant on hydro, nuclear, natural gas and renewable generation, the differences would be even more dramatic. The company would get as little as $2 million to $4 million in allowances under the emissions scenario but receive between $99 million and $174 million if allocations were based on output, according to the report.

On a somewhat different subject, the report made another fairly startling point: Since 1990, overall carbon dioxide emissions from power plants have gone up by 29 percent; but emissions of other pollutants, including sulfur dioxide and nitrogen oxide, have dropped more than 40 percent. The difference, suggested the report's authors, was that the latter two pollutants are regulated under the Clean Air Act, while carbon dioxide has not been.      

 (Photo: Lake Almanor, California, part of PG&E hydroelectric system; Wikipedia)

The document also contains a requirement that officials of the new institute seek matching funds from other sources at least equal to the money coming from ratepayers.

Overseeing the institute, which was charged with working collaboratively with the state’s colleges and national laboratories, will be a board composed of government officials, university officials, lawmakers and representatives of utilities, environmental groups and certain industries, including agriculture. It will be co-chaired by the utility commission president and the president of the University of California. A physical headquarters for the institute is yet to be determined.

The California commission’s vote comes amid increasing calls for public financing of research and development to discover and implement new technologies to mitigate global warming (see Climate Law Update story here).

Still, there was clearly unease about charging the state’s ratepayers for the costs. The institute will be funded by a surcharge on electric and gas customers’ bills. Peevey noted that some have asked why utility ratepayers alone should be asked to pay for the institute. His response:

“The short answer, frankly, is that they shouldn’t. Ratepayer financing should serve as seed money to leverage other public and private sources of funds, and I think it will. Certainly broad-based taxpayer financing would be preferable, if it was available. But we cannot wait for the Legislature to allocate funds any more than the United States can defer decisive action on climate change until China and India take action.”

Despite voting for the proposal, Bohn expressed deep reservations:

“By this action we announce our intent to assess the private utility ratepayers of the state of California $600 million over a 10-year period in order to establish and operate a new organization devoted to seeking and implementing technology solutions to the global problem of climate change. We are, in short, telling the ratepayers that as a condition of receiving essential utility services delivered by monopoly enterprises under our jurisdiction they are required to pay for research and commercialization of technologies that may indeed never deliver the results that impact global warming or, at best, are unlikely to deliver those results in the near term.”

Bohn concluded that the commission's decision "pushes the boundaries of our duty and our jurisdiction almost to the breaking point."

The institute’s work is to be carried out under a strategic plan scheduled to be in place in about a year. The governing board was also charged with establishing panels to establish protocols for transferring technology and looking at potential workforce impacts in the energy sector.

In a separate move, the utility commission approved a $4.6 million request by Southern California Edison to participate in a study on reducing greenhouse emissions from coal-fired electricity generation. The technology under consideration, according to a statement from the utility commission (see text here) would convert coal through a gasification process into predominantly hydrogen and carbon monoxide gases. The hydrogen would fuel a power plant while the carbon monoxide would be sequestered underground.

Peevey said the company would participate in a project known as the Southwest Regional Partnership on Carbon Sequestration. Among other participants, the U.S. Department of Energy has put $65 million toward the effort, he said.

(Photo of California Public Utilities Commission building: Climate Law Update)

Johnson, in the letter to Boxer, the California Democrat who chairs the Senate Environment and Public Works Committee, and Sen. James Inhofe, the committee’s ranking Republican from Oklahoma, seemed to acknowledge a decision to regulate could have wide ramifications:

"Such an approach makes sense because, as the Act is structured, any regulation of
greenhouse gases - even from mobile sources - could automatically result in other regulations applying to stationary sources and extend to small sources including many not previously regulated under the Clean Air Act. Consequently, any individual decision on whether and how sources and gases should be regulated may dictate future regulatory actions to address climate change. My approach will allow EPA to solicit public input and relevant information regarding these interconnections and their possible regulatory requirements.

"This approach gives the appropriate care and attention this complex issue demands. It
will also allow us to use existing work. Rather than rushing to judgment on a single issue, this approach allows us to examine all the potential effects of a decision with the benefit of the public's insight. In short, this process will best serve the American public."

But Johnson in his letter also noted that his agency is facing legal action and petitions on the issue. Among them, although he did not mention it specifically, is an attempt by a number of organizations to impose greenhouse gas controls on a proposed Utah power plant (see Climate Law Update story).

The latest move follows by weeks Johnson’s issuance of his formal reasons for turning down California’s attempt to regulate greenhouse gas emissions from motor vehicles, in a move that also has raised hackles on Capitol Hill and among environmentalists (see Climate Law Update story).  

In his letter Thursday, Johnson wrote that he would direct the EPA staff to prepare an "Advance Notice of Proposed Rulemaking" to "discuss and solicit public input on these interrelated matters." That document would be issued later this spring and then would be followed by a public comment period. "The agency will then consider how to best respond to the Supreme Court decision and its implications under the Clean Air Act," he wrote.

Officials in Johnson's office did not return a call from Climate Law Update seeking comment on the latest move. 

Boxer, an outspoken environmental advocate, issued a statement accusing Johnson of "foot-dragging." She said the letter "makes it clear that EPA doesn't intend to take any real action to combat global warming before President Bush leaves office."

Aides to Inhofe, who has called global warming “the most media-hyped issue of all time,” could not be reached for comment Thursday.

Environmental groups and California government officials ripped Johnson. Said David Bookbinder, chief climate counsel for the Sierra Club, in a written statement (see press release):

"One year after the Supreme Court recognized the grave problem of climate change and ordered EPA to take the formal steps necessary to begin controlling global warming-causing pollution, Administrator Johnson has decided that what he needs to do is think about it some more.  After a year of navel-gazing, Administrator Johnson says that later this spring he will ask the public to provide EPA with (a) the "best available science" on global warming, and (b) their views on the "interconnections" between various parts of the Clean Air Act that "may" be affected by any decision to begin limiting GHG emissions.  Then, after months of public comments and some unspecified period thinking about them -- and only then -- will EPA "consider how best to respond to the Supreme Court decision and its implications under the Clean Air Act."

The Natural Resources Defense Council also weighed in (see press release), with a statement by David Hawkins, the environmental group’s climate center director. Hawkins said the announcement “follows an industry script designed to delay any real action to reduce global warming pollution for as long as possible and certainly until the next administration.”

Both Hawkins and Bookbinder threatened new court action. Hawkins said the NRDC would, as part of a coalition of groups, “return to federal court next week to enforce compliance with the Supreme Court’s decision.”

The negative reaction was not limited to environmental groups. Stanley Young, a spokesman for the California Air Resources Board, told Climate Law Update the "EPA's inaction heaps delay upon delay." However, he said the air board would continue moving forward with implementing California's own greenhouse gas reduction law, AB 32.

Kenneth Alex, a top lawyer for California Attorney General Jerry Brown, in an interview with Climate Law Update, said the latest move was part of “an ongoing abdication of responsibility and it’s nothing new.” Brown has been aggressively moving to require local governments and private entities in California to take steps to curb greenhouse emissions.

“In essence,” said Alex, a supervising deputy attorney general, “they’ve opened a public comment period on nothing.”

(Photo: Sen. Barbara Boxer via official Web site)

Although Brown, among other actions, has already sued and settled with one California county (see also press statement), and struck a separate legal deal with a major petroleum company (settlement and press release), he received a generally warm welcome from the officials. He even drew laughter when he told them his office would “help” them move forward by suing their city councils.

Brown advocated what he called “elegant density” in urban areas as a primary means of achieving lower emissions by reducing the time people spend commuting in their cars. According to California Energy Commission estimates, nearly 41 percent of the state’s greenhouse gas pollutants come from transportation.

“It’s up to you. You’re the custodians of land use and land use is connected to vehicle miles traveled,” Brown said in outlining his anti-sprawl agenda.

“The biggest thing of all is to shift the outward pressure and make it turn inward to a more elegant dense vibrant urban experience. That’s what local government has to do,” he said. “Now we have to get people from the suburbs to start coming back.”

Brown noted with some bemusement that when he was mayor of Oakland he advocated attracting 10,000 more residents into the central urban area but was met by opponents wielding CEQA challenges. He also noted that the slumping housing and construction market could actually give local officials some breathing room to “align land use with the need for a lower-carbon future.” Local officials, he said, need to include the new concepts in the design of general plans and city zoning, rather than waiting until they are presented with specific development projects.

Brown, a former California governor, noted he has long been talking about limits on growth and consumption, sometimes to little effect.

"Turns out that California never grew so fast as when I declared we were into an era of limits," he joked.

Nichols, who in the past has criticized Brown’s legal tactics in his push to force consideration of global warming in long term development, transportation and industrial plans, nevertheless echoed much of his theme in her remarks. She said that unlike previous attempts to control other forms of air pollution, “we can’t get there from here with technology alone.” Part of the reason for that, she said, is the length of time it takes to replace the existing fleet of vehicles on the road.

“For the first time under AB 32 we are going to have to take action that limits the growth and amount of use of [vehicle miles traveled],” Nichols said. “That’s the little hidden fact that’s not being talked about as much when people talk about the global warming problem.”

She noted that the state has in the past not had a lot of success in promoting so-called smart growth, and she recalled that some “brute force” attempts to limit vehicles, such as through fees and bans on parking, have been rejected “pretty roundly.” But she suggested much of that might have to change.

“We’re going to have to find some ways to create new incentives as well as, I think, potentially new directions that we’re going to be developing in this area,” she said.

Local government representatives in the coming weeks and months will be getting a big dose of global warming. On Friday, they were invited to attend another meeting in Oakland with officials putting together the air board’s AB 32 blueprint, or “scoping plan.” In addition, four more workshops in the series kicked off Thursday were scheduled for April 3 in Sacramento, April 24 in Visalia, May 15 in Los Angeles and May 23 in Monterey. More information is available from the Local Government Commission.

(Photo of Jerry Brown via Wikipedia)

The report noted that meeting California’s ambitious goals for renewable power “will require a substantial amount of new transmission development, as most large-scale renewable resources are located in remote areas rather than near the state’s major load centers.” State law, although it has some flexibility, requires that 20 percent of electric energy come from renewable resources by 2010 and a 2005 executive order signed by Gov. Arnold Schwarzenegger anticipates that figure should hit 33 percent by 2020 as part of the state’s strategy for meeting the requirements of the greenhouse gas reduction law, AB 32.

The report incorporated a variety of assumptions, including renewable demand, and information about current generation and the transmission system. It also looked at resource operating and cost assumptions, as well as economic assumptions. A key criteria was the development of the “base case,” or group of resources the RETI process included as the starting point. For power generation, that incorporated renewable projects that are operating or currently under construction, or those that are in advanced planning stages with contracts and permits in place.

Whether or not to include a technology in the next phase, known as Phase 1B, of study depended on a number of factors, according to the report, including the likelihood the resource had enough potential to contribute to the state’s renewable portfolio standards, the ability to deliver power cost-effectively to the grid and the maturity of the technology. According to the report: 

“Based on these assessments, resources with limited potential to provide energy to California are eliminated from further review in Phase 1B. While there may be discrete resources in these regions that might provide energy to California, there are not sufficient resources in these areas to merit exploring potential new transmission to access these resources.”  

The report concluded that anaerobic digestion -- which generates power from such sources as municipal sewage treatment plants and livestock operations -- and landfill gas were, among other things, too small to include in the next phase. On the other hand, it concluded the potential for solar voltaic was "virtually unlimited" and that for biomass was “substantial.”

Interested parties can participate in a Webcast scheduled for March 26 and can submit comments until March 28. Overseeing the RETI project are the California Public Utilities Commission, the California Energy Commission and the California Independent System Operator, as well as several publicly owned utilities.

An recently prepared by Peter V. Allen and Paul C. Lacourciere of Thelen Reid Brown Raysman & Steiner contains further details and background about the RETI process. It is available here. 

(Wikipedia photograph of electrical transmission lines in Sweden)

Although some groups, including those concerned about pollutants affecting poor and minority populations, have opposed cap and trade markets, the idea has gained support among other environmentalists and business groups. Peevey strongly backed the approach in remarks before the commission voted Thursday:

“A cap and trade program is likely to produce additional emissions reductions beyond the mandatory programs, it can tackle a wider variety of sources, potentially at a lower cost. It also encourages investment in innovative technologies that lower greenhouse gas emissions.”

But Peevey acknowledged that officials have only just begun to take on what he called the “thorny issue of allocation,” referring to the critical question of how emissions credits or “allowances” will be distributed among those producing greenhouse gases. Under a cap and trade system, credits represent the right to emit a certain amount of greenhouse gases. The document approved by the two commissions recommends that some credits be auctioned, suggesting that the money be used to benefit ratepayers or support energy efficiency and renewable energy investments. But it does not resolve important questions such as what proportion of the credits should be auctioned and how many sold or given away for free:

"Based on the current record, we are not able to determine the proper
relative roles of auctions and administrative allocation of allowances in a
deliverer-based system. Several parties recommend that there be a gradual
transition over several years from relatively more administrative allocations
initially to relatively greater reliance on allowance distribution via auctions.
Distributing some amount of allocations administratively in the early years of
the program could reduce the immediate impact on entities that would bear the
costs of obtaining allowances, and would give them more time to develop
emission reduction strategies. Based on the current record, it may be reasonable
to provide a transition from small amounts of auctioning in the early years to
greater amounts in later years. However, we require more analysis before
making a determination on this issue."

Peevey, during his presentation, said it would not be the commissions’ intention to punish utilities based on their past investments or decisions made prior to the passage of AB 32. However, he cautioned that the state’s retail electricity providers “are starting off in very different positions” with respect to their emissions. He noted, for instance, that some large public utilities spew twice as much carbon dioxide per unit of energy produced than do the state’s private utilities and some other public entities.

The allocation recommendation is expected to be addressed in a subsequent document to be ready in August.

Although other commission members lauded the recommendation, Commissioner Timothy Alan Simon expressed some concerns about the potential impact on municipally owned utilities. He said he would “closely monitor” the next phase to make sure that those utilities, over which the commission has no regulatory authority, are “treated fairly.”

Brown (pictured; California Attorney General's Office photo) sent the letter to 534 public officials in all of the state's 58 counties and nearly 200 cities. In it, the attorney general reiterated his efforts to link CEQA's demand for formal review of development and other projects that pose significant impacts on the environment with the global warming law, which demands significant cuts in the state's greenhouse gas emissions by 2020, and a 2005 governor's executive order anticipating even deeper reductions. He cited the Legislature's passage last year of SB 97, which among other things requires state officials to prepare guidelines for how to deal with greenhouse emissions under CEQA:

In California, we have recognized the urgent need to curb greenhouse gas emissions by committing to reduce emissions to 1990 levels by 2020, and to 80 percent below 1990 levels by 2050. However, even under the aggressive timetable that the Governor and Legislature have set, most of the rules being developed to reach these targets will not take effect until 2012. A tremendous amount of local and regional planning will occur between now and then. We will experience the effects of the decisions made today well into the future. Our challenge is to ensure that the planning occurring now allows us to meet the goals we have set for ourselves.

 Fortunately, local agencies have at their disposal an extremely powerful tool. CEQA requires public agencies to mitigate or avoid “significant effects on the environment” when it is feasible to do so. As the Legislature recognized last year when it enacted Senate Bill No. 97, greenhouse gas emissions are the type of environmental effect that agencies must address under CEQA. Throughout California, cities, counties, and regional planning entities have begun to address global warming as an integral part of their planning efforts, as CEQA requires, even in the absence of regulatory thresholds of significance.

In his statement, Brown noted that he had been prodding local officials to analyze their global warming footprints under CEQA, noting he has sent formal comments under the law to 23 jusrisdictions. Those efforts, which have included litigation or threats to take court action, produced noteworthy agreements with San Bernardino County and ConocoPhillips on strategies to address the issue.

The workshops are intended to address a number of questions, including how cities and counties can analyze the global warming impacts of development and what measures can be taken to reduce them. The gatherings are planned for March 20 in Oakland; April 3 in Sacramento; April 24 in Visalia; May 15 in Los Angeles and May 23 in Monterey.

The panel, which adopted its final report February 11, clearly foresees that virtually no individual nor business will avoid the impact of meeting the anticipated reductions:

   Policies implemented under AB 32 and the Governor’s Executive Order for 2050 must address all sectors of California’s economy so that all significant sources of GHG emissions participate in both the challenges and opportunities afforded by this critical piece of state legislation. This broad-scaled approach is the most likely to create a level playing field, and address new alternative energy sources and fuels that could be used in multiple sectors. For example, policies need to recognize that electricity and biofuels will likely compete with more traditional transportation fuels in the future; therefore, policies that address only the electric sector or only the petroleum refining sector are unlikely to achieve the goals of AB 32.

The report outlines 55 recommendations for meeting the challenges posed by the state's political leaders covering virtually all sectors of the economy, including financial institutions; transportation; energy use by industry, commerce and residents; electricity and natural gas; agriculture; forestry and water. Among the eye-catching projections in the report: California's future sources of electricity and transportation and heating fuels will have to be virtually carbon-free by 2050. Renewable energy technologies, including wind and solar, the report said, offer the "technical potential" to generate all of the state's electricity, despite a number of technical and implementation obstacles that will need to be overcome.

Among the report's recommendations is the establishment of a "California Carbon Trust" that could use money, likely coming from an auction of emission allowances, to encourage reductions in carbon beyond whatever cap is established and to further other goals, such as funding research and development projects. It also includes recommendations for residential planning efforts to encourage "transit villages," new forms of automobile insurance designed to give drivers financial incentives to spend less time behind the wheel, and taking steps to encourage the development of renewable energy so that one-third of the state's power can be generated by such means.

The full air board, which is the lead agency implementing California's greenhouse gas-fighting efforts, was scheduled to get its first formal look at the report on February 28. The board is chaired by Mary Nichols, a Schwarzenegger appointee.