As federal policy makers push for GHG regulation and transparent markets, the California experience shows what works and what doesn’t work.
Carbon and the Constitution
State GHG policies confront federal roadblocks.
(MAC) recommends an initial scheme of free allocation of some allowances and auctioning the other share of allowances, with the percentage of allowances auctioned increasing over time. This final MAC recommendation represents a significant departure from the original legislative scheme, and is legally significant. In its legislation, California intended to regulate GHGs from the utility sector by regulating all retail electric load-serving entities (LSEs), or retailers of power. Legally, all of these LSEs are located in-state or at least doing business in-state, and regulation would be imposed at the retail level on California activities.
However, this MAC recommendation, which in 2008 was accepted to be implemented by the California Air Resources Board (CARB) and California Public Utilities Commission (CPUC), shifts the point of control upstream to encompass power wholesalers at the first-seller transaction. 15 This change makes it similar to the RGGI point of regulation. With the restructuring of California’s electric market in 1998 and the subsequent restructuring in 2001 due to an electric energy crisis, 16 most of the power retailed in the state first goes through a wholesale sale, which legally isn’t within state regulatory jurisdiction. California’s choice to regulate carbon at the point of generation allows California to get at the problem of high-carbon power leakage into the state.
California’s power comes significantly from outside the state: Roughly one-half of California’s electric-sector GHG emissions are the result of electric power imports from out-of-state, now generated greatly by coal-fired power plants. 17 While California has little in-state coal generation, various California LSEs, particularly the Los Angeles Department of Water and Power (LADWP), 18 import significant amounts of coal-fired power from various other states. LADWP has argued that it serves a lower-income population and that the change to a first-seller point of CO 2 regulation is “unfair treatment” and targets Southern California. 19 The California legislation, A.B. 32, specifically requires CARB to consider the cumulative impact of direct and indirect sources of emissions on adversely affected communities.
Southern California Edison proposed coal-fired generators should receive free allowances to shield ratepayers from carbon allowance costs. 20 LADWP requested an opt-out option from the cap-and-trade requirements. The utility stated that if it had to comply with California’s carbon cap-and-trade requirements, it either would have to jettison its renewable energy program or raise rates substantially.
If the California MAC recommendations are followed when the program begins in 2012, California also would encompass the individual wholesale generator level. Implementation would have to navigate the Supremacy Clause and the Compact Clause requirements under the U.S. Constitution.
A major practical and policy problem identified by the RGGI states, as well as California, is so-called “leakage.” Leakage occurs when “generators outside of the capped region export[...] power to load-serving entities ... within the region without being covered by the regional carbon cap,” 21 and is defined by the RGGI scheme “as the increase in CO 2 emissions outside the RGGI region that may ‘net out’ (or partially eliminate) a portion of the emissions reductions made within the RGGI region under the Program.” 22
The reality is that