California eyes dividends, deficit cuts from cap-and-trade

Feb 9 (Reuters) - Revenue raised by California's greenhouse-gas emissions trading program could be distributed to state residents to offset higher fuel costs or used to reduce the state's projected deficits, a state budget watchdog agency said on Thursday.

"Our analysis indicates that such revenues could be returned directly to Californians - such as in the form of a check - as a dividend that would be intended to offset their increased expenditures on goods and services that ultimately would become more expensive as a result of the cap-and-trade program," the Legislative Analyst's Office said in a report.

The report added that revenue from the program, which goes into effect next year, could also be used as part of a "multiyear approach to reduce the state's projected General Fund deficit."

"The availability of these revenues could allow the state to avoid other actions, such as cutting governmental programs or increasing state revenues, that could slow the state's economy," the report said.

The report comes as California prepares to implement its Global Warming Solutions Act enacted in 2006. Commonly referred to as AB 32, the law established the goal of reducing greenhouse gas emissions in the most populous U.S. state to 1990 levels by 2020.

To meet that target, California will establish a so-called cap-and-trade program that issues allowances to companies that emit carbon dioxide and other greenhouse gases at facilities such as power plants, refineries and factories and that permits the allowances to be traded.

Revenue from the program is expected to vary annually, from less than $1 billion to nearly $14 billion, according to the Legislative Analyst's Office.

Governor Jerry Brown's state budget plan expects the program to generate $1 billion in revenue in the next fiscal year, including $500 million that will be used to fill the state's general fund, which faces a $9.2 billion deficit.

Brown also wants to put cap-and-trade revenue toward other clean-energy, natural resources and other uses, including toward funding a planned statewide high-speed rail network. The Democratic governor put the idea of funding the rail project that way out recently during a television interview, catching lawmakers by surprise.

Legislators from both parties in the Democrat-led legislature have become increasingly concerned about the planned rail network, which is also under attack from Republicans the U.S. Congress and California's Central Valley, where the U.S. government is insisting the network's first line must be built to receive more than $3 billion federal funds.

At issue for California lawmakers are escalating cost projections for the rail project. Its latest estimated cost nears $100 billion, which eclipses its previous estimate of $43 billion as well as the $10 billion in general obligation debt voters approved in 2008 to help build the rail system.

Lawmakers are also concerned that voters are souring on the ambitious rail plan, which is intended to connect California's far-flung metropolitan areas. Nearly two-thirds of voters want lawmakers to put the bond package back on the ballot, and if given another vote on it, 59 percent would reject it, according to findings of Field Poll released in December.

Brown is enthusiastically behind the rail project. He met with U.S. Transportation Secretary Ray LaHood on Thursday and both men affirmed support for it.

After a tour on Wednesday of a Siemens plant in Sacramento, California where the company light-rail car, LaHood said the Obama administration stands behind putting the rail system's first line in the Central Valley to link the cities of Fresno and Bakersfield.

That idea is not going over well in California's legislature, drawing criticism from lawmakers from both parties. While the farming region's flat terrain may be suitable for running high-speed trains, many lawmakers would prefer to start lines in urban areas -- and many would prefer the state not start the project at all given its costs.

Brown's finance department is preparing a report on rail project that will help guide lawmakers in coming months to decide whether California should issue the first set of bonds to finance construction of the project's first leg. (Reporting By Jim Christie; Editing by Bernard Orr)

California cap-and-trade money should be spent carefully, analyst says

California's experiment in combating global warming by creating a cap-and-trade program could generate more than $12 billion a year in revenue, but officials can't rely on that windfall to fix the state's fiscal problems, according to a new report.

The nonpartisan Legislative Analyst's Office said the amount of money generated by auctions of credits allowing polluters to release greenhouse gases would vary wildly, from less than $1 billion to $14 billion in some years. The market-based system is intended to drive down the amount of greenhouse gases discharged in California by making it increasingly expensive to pollute.

Gov. Jerry Brown has his eyes on the first batch of cash, though his plans are still vague. He's suggested spending $1 billion of the money generated by the first auction, scheduled for August, on renewable energy development and infrastructure. He also wants to put about $500 million toward the state's general fund and has spoken about using future revenues to help finance a controversial high-speed rail line linking Los Angeles and the Bay Area.

Business groups contend that the money should be returned to companies who have to pay higher fees to meet California's new emissions requirements. The Air Resources Board, which designed the cap-and-trade program, has proposed returning the money to consumers to compensate them for possibly higher energy prices.

The legislative analyst's report raises red flags for Brown. It warns that the amount of money generated by the program will fluctuate wildly from year to year. "This means that they may be more appropriately used for one-time or short-term, purposes rather than for the support of ongoing programs or tax reductions," it states.

The report also cautioned that the state can only legally spend the money on easing the impact of greenhouse gases -- or muster a two-thirds vote of legislators to spend it elsewhere.
"Appropriate uses of the revenues for mitigation purposes could potentially include expenditures on energy and water-use efficiency programs, alternative fuel programs and investments in renewable energy projects," the report states.

Federal Court Blocks California Carbon Emissions Rule

Cheryl K. Chumley writes from Northern Virginia

A federal district court has put a temporary stop to a California Air Resources Board (CARB) rule restricting carbon dioxide emissions from transportation fuels. According to the court, the rule violates the U.S. Constitution’s Commerce Clause by discriminating against oil and biofuel producers located outside the state of California.

The court’s Dec. 29 decision did not take issue with CARB’s asserted authority to impose carbon dioxide restrictions and stringent reporting requirements. The decision requires CARB rules to avoid discriminating against fuel sources based on where they are produced.

‘A Belated Christmas Present’
“I, along with every single California consumer, was given a belated Christmas present when the Eastern District of California Federal Court placed a stay on the implementation and enforcement of California’s Low Carbon Fuel Standard,” said Tom Tanton, president of T2 & Associates, an energy technology firm, and a fellow in environmental studies at the Pacific Research Institute. “Potentially increasing fuel costs by 20 or 30 percent for no discernible benefit flies in the face of good government and environmental protection.”

Tanton also said it was “high time” the CARB was challenged on its members’ “roughshod” treatment of Californians.

Damaging California’s Economy
“Oil and gasoline are used in transportation vehicles precisely because they are less expensive than alternative fuel sources,” said Heartland Institute science director Jay Lehr. “Reducing carbon dioxide emissions by punishing inexpensive energy sources is only going to hurt California consumers. The court gave California consumers an economic break by halting the CARB Rule.”

“Oil and gasoline are also more dependable fuel sources than the proposed alternatives,” Lehr explained. “California has for years been trying to impose alternative fuel mandates on its consumers, but even the enormous power of the state has been unable to force such a transition. The state has done its best to create and encourage hydrogen highways, hybrid vehicles, electric plug-in vehicles, fuel-cell vehicles, etc., but where are the results from all these expensive programs? The results are merely been money sent down the drain.”

‘Facially Discriminatory’
Trevor Burrus, a legal associate with the Cato Institute’s Center for Constitutional Studies, said the court’s decision will likely withstand appellate court review.

“At the very least,” he said, “it will not be easily overturned.”

The in-state versus-out-of-state discrepancies involved in the California case provide solid cause for discrimination charges, Burrus says.

“As the court describes, the different treatment between out-of-state providers and identical in-state providers is facially discriminatory and thus must meet strict scrutiny, … the highest level of constitutional scrutiny,” he said. “In order to survive, a law must not only forward a compelling interest of the state, but it must be narrowly tailored to reach that goal.”

In other words, Burrus explained, “if there are other methods of accomplishing the goal that do not discriminate, then the law will fail.”

Houston poised to become California CO2 trading hub

London, 1 February, 2012: Reuters

California will next year host the world’s second biggest CO2 market as it tries to roll back its carbon footprint two decades, but it will not be San Francisco or Los Angeles that will be the center of trade, but the U.S. oil-dealing hub in Texas. Home to dozens of oil, gas and power firms, the city of Houston stands to emerge as the nerve center for trade in California emission permits when the market starts in 2013.

In an ironic twist, ICAP Energy, Vitol and JP Morgan, as well as several other international banks, will run desks aimed at cutting emissions while sitting in offices in the country’s biggest polluting state.

“At this point, California carbon is being seen largely as an extension of the energy business and Houston is the main hub for energy,” said Henrik Hasselknippe, director of global project development at the Green Exchange (GreenX).

Banks, brokers and trading houses will join nearly one dozen Houston-based power, oil and gas companies who will face caps under California’s cap-and-trade scheme and trade permits from Texas.

“It’s very safe to say that Houston should have a vibrant capacity to do some carbon trading, specifically for the California market, specifically because we have a vibrant energy trading sector here,” said Mithun Rathore, a broker at Amerex.

Companies subject to caps “are already attributing or correlating carbon compliance with west coast power trading, so there is a good number of companies assigning their carbon trading to their west power traders, who are pricing (CO2 permits) into the forward curve,” he added.

Some observers said while New York is a more suitable base for financial trade, specialized energy-related commodities, such as carbon, have a hard time competing there.

“The carrying costs of New York are very expensive. When you compare (carbon trading) to the benefits from general financial trading – it may not be enough to compete,” said Victor Flatt, an environmental law professor at the University of North Carolina.

TESTING THE MARKET

Trade in California Allowances (CCAs) has been piecemeal so far, but analysts predict activity will take off in the second half of the year, when companies facing caps are cleared to begin buying pollution permits.

Investment bank Barclays Capital was an early player in the California carbon market, having traded the first forward CCAs in November 2010, but has since closed its New York emissions trading desk citing the uncertain regulatory environment and poor margins.

But Barclay’s move to close operations is not a common trend seen at other institutions.

One vice president of power and gas at an international bank who requested anonymity said his team “has to follow” California carbon, but has so far only bought a small amount of allowances in preparation for a larger market.

Meanwhile, Fabio Nehme, general manager for environmental products at the Houston office of energy company EDF Trading’s, said his firm was “getting organized” to be able to engage more actively in the market once trading volume becomes more robust.

Amerex’s Rathore said he expects the larger California emitters in the power sector to start becoming active in pre-compliance trade by the second quarter of the year, ahead of the first auction of CCAs.

But liquidity should increase later this year or next year when large energy companies who export oil and gas to California, prepare join the mandatory market in 2015.

“It’s smart to start understanding the market early,” he said. “Once the clock starts ticking you want to make sure you are not caught with your pants down.”

Some observers expect carbon trading activity to move westward after traders get their feet wet in California emissions trading in the program's early years.

CALIFORNIA JOBS

Tim O'Connor, director of California climate policy for the Environmental Defense Fund', said it is natural for trading to start in Houston because there is an infrastructure already in place.

But as demand for permits increases, he said he expects California's cities to create new jobs for for lawyers, consultants and traders who understand the state's market regulations.

"I think what we will see is increasing pressure for people who are here in California who know the California landscape and how the market works," he said.

He added that despite the fact that some California carbon market jobs will be based in Houston, it does not mean "green jobs" will be lost in the state -- a criticism of opponents of cap-and-trade.

O'Connor said the program will generate new jobs in companies specializing in energy efficiency, renewable energy and clean technology.

California carbon trading at $15

Following news that the state’s largest emitter was looking to purchase carbon allowance and offsets, California carbon allowances (CCAs) saw prices rise to $15 per ton.

The Intercontinental Exchange saw 130,000 CCAs trade this week after Pacific Gas & Electric announced it was looking to buy a substantial amount of carbon to meet new state requirements beginning in 2013.

Carbon offsets saw a very busy week as well, with 180,000 Ozone Depleting Substances (ODS) credits trading at upwards of $9