By Leanna Sweha
As engineers shore up storm-damaged dams and levees, there are other kinds of leaks to consider – the kind caused by state climate change law, such as Cap-and-Trade.
The Air Resources Board (CARB) plans to amend Cap-and-Trade’s “leakage” rules, and many industries are worried the changes may increase leakage.
So what is leakage? It’s when Cap-and-Trade’s compliance costs cause emissions to decrease in California and to go up by the same amount outside of California. A simple example is a company leaving the state to set up shop elsewhere. Another would be where an in-state company loses customers to an out-of-state competitor, which increases production to make up for the in-state company’s decrease in production.
Leakage is a bad thing. First, there is no net reduction of greenhouse gas emissions – in fact, there may be increased emissions, especially if a product must be transported back into California. Second, the state loses jobs and tax revenues. Third, industry fails to become more efficient and greener. Finally, other jurisdictions considering Cap-and-Trade may think twice.
California climate law requires the state to avoid leakage, so the state has built industry protections into the Cap-and-Trade program.
To reduce compliance costs and maintain incentives to produce in California, CARB gives out free emission credits (“allowances”) to industry, based on a formula that includes an “Assistance Factor.”
To determine the Assistance Factor, CARB analyzed leakage risk and assigned industry into three leakage risk categories – high, medium and low. Not surprisingly, leakage risk is highest for industries with “emissions intensive” production (high compliance costs) and for industry that is “trade exposed” (significant out-of-state competition).
Oil and gas extraction, cement, chemical, and glass manufacturing are high risk. Their Assistance Factor is 100 percent through 2020. Petroleum refineries and food manufacturing are medium risk, and their Assistance Factor declines from 100 to 75 percent starting in 2018. Pharmaceutical, and aircraft manufacturing is low risk. Their Assistance Factor declines from 100 to 50 percent starting in 2018.
This means that, starting in 2018, medium and low risk industries will have to either reduce emissions or purchase more allowances on the market, both of which will likely lead to higher production costs.
To add to that, for the post 2020 compliance periods, CARB has proposed a new way to calculate leakage, which tends to lower the Assistance Factor across the board. The new method would combine a risk factor for both international and domestic leakage in each industry sector. Industry is skeptical of the studies on which this proposal is based and has questioned the need for changing the method.
It’s in this context that Dorothy Rothrock, President of the California Manufacturers and Technology Association, wrote last week in the Sacramento Bee that Cap-and-Trade needs to “retain cost-containment tools for in-state manufacturers so they can afford to meet the 2020 and 2030 climate change goals.”
Rothrock wrote that climate change policies are a cause of high energy prices, which in turn have reduced investment in manufacturing.
She wrote, “In 2015 we received only 1.5 percent of U.S. manufacturing investment, the lowest of all states. This is far below the investment we need to modernize our facilities and maintain a healthy share of U.S. manufacturing employment.”
Jobs are also at risk. “Since the end of the recession in 2010, California has grown manufacturing jobs at a low rate of 2.6 percent compared to the country’s 7 percent.”
Rothrock’s column concludes, “Climate change leadership that speaks to the needs of manufacturing will attract other states to join the fight and would be a win-win for the global environment and the economy of California.”
One member of Rothrock’s association is California Steel Industries, the only remaining steel rolling plant in Southern California. In a rule-making comment letter the company said, “The proposed Assistance Factor reduction will result in CSI’s competitiveness being severely threatened…Our foreign competitors in China and other nations, as well as our domestic competitors, will be happy to undercut our costs and take away our business, if they can.”
The company also noted, “Furthermore, any resulting loss of CSI’s steel production will simply be replaced by less efficient production in other states and other nations. This will be accompanied by additional shipping distances resulting in greater truck and rail emissions. Altogether, this means increases, not decreases, in global GHG emissions, and an accompanying decrease in steel manufacturing jobs and associated supply chain jobs in California.”
Leanna Sweha’s note on “Preventing Leaks – That is, the Cap-and-Trade Kind” (Vanguard, February 28, 2017) highlights an important issue with state-level schemes (like cap-and-trade) to reduce green-house gas emissions. In the beggar-thy-neighbor world of contemporary American politics, local domestic manufacturers must have growing incentives to invest, and to remain sited in a state, like California, that aspires to environmental leadership. These incentives amount to socialization of the costs of GHG emission reduction – transfer of financial burden from private sector actors to the public at large, which means the residents of the state. In the absence of socialization, the efficacy of the state-level mechanism to actually reduce emissions by its local manufacturing sector is undermined. Or as Ms. Sweha notes approvingly:
“…Starting in 2018, medium and low risk industries will have to either reduce emissions or purchase more allowances on the market, both of which will likely lead to higher production costs.
…
It’s in this context that Dorothy Rothrock, President of the California Manufacturers and Technology Association, wrote last week in the Sacramento Bee that Cap-and-Trade needs to ‘retain cost-containment tools for in-state manufacturers so they can afford to meet the 2020 and 2030 climate change goals.’
Rothrock wrote that climate change policies are a cause of high energy prices, which in turn have reduced investment in manufacturing.”
Ms. Sweha’s note makes clear that this includes tweaking (increasing) the allocation of free (no-cost) emission allowances for selected industries to avoid increasing their compliance costs.
Although the goal of AB 32 was precisely to reduce GHG emissions, this point of view seems to suggest that if reductions lead to higher private sector costs we should consider foregoing the reductions, through increased allowances. On the other hand, if socialization of the costs is what it takes to achieve GHG reductions without “leakage” (export to other states) we should be clear, transparent and deliberate about it. As California continues its leadership on climate change, we should be certain that we make those socialized investments directly in technologies and measures that actually reduce emissions in order “to achieve the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions,” the explicit goal of AB 32. Whatever the eventual fate of state-level cap-and-trade and other so-called “market-based” approaches to GHG reduction, we should be clear that socializing costs is among their fundamental elements.