Cleaner air Is actually hobbling California’s climate fight

For once in California’s fight against climate change, lower greenhouse gas emissions aren’t cause for celebration. The recent drop in pollution as many factories sit idle is temporary, but it could hurt the state’s anti-global warming programs while it lasts. Many of those green initiatives are funded through a cap-and-trade system and the sale of permits to businesses that pump heat-trapping gases into the atmosphere. Last year, California spent about $2 billion from the sales to continue building a high-speed rail system, buy electric school buses and prevent wildfires—all steps to chip away at emissions. Now emissions have decreased as the pandemic has closed offices, factories and schools. State revenue from selling permits in is in jeopardy.“That money is going to come under increasing pressure,” said Chris Busch, research director for the consulting firm Energy Innovation. “It was always everybody’s favorite pot of money to pull from.”

Analysts expect that the next quarterly auction, on May 20, won’t sell out of all the current permits available. Dozens of programs in California could be affected, including electric vehicle rebates, subsidies to help low-income residents insulate their homes and other “things that have real impacts on people’s lives,” said Katelyn Roedner Sutter, manager of the U.S. climate program at the Environmental Defense Fund.“I don’t think anything is completely safe,” she said. 

Launched in 2012, the cap-and-trade system, the nation’s only economy-wide carbon market, serves as a primary weapon to achieve California’s goal of reducing economy-wide emissions to 40 percent below 1990 levels within the next decade.

Here’s how it works: Each year, the state sets a limit on emissions across its economy—the cap—and requires businesses to buy a permit for each ton of greenhouse gases they emit. They can buy their permits, called allowances, either at quarterly state-run auctions or on a secondary market, where companies trade them like any other financial instrument.

The auctions have state-set minimum “floor” prices that creep higher over time, making emissions more expensive. And the cap ratchets lower year by year.The last auction, in February, raked in nearly $613 million for climate programs, with all of the available allowances selling out. One month later, a coronavirus outbreak in the San Francisco Bay Area prompted Governor Gavin Newsom to order businesses closed. The economy slammed to a near halt. Newsom has allowed some businesses to resume limited operations but has given no timetable for fully reopening the state’s economy.A spokesman for the agency that oversees the cap-and-trade system, the California Air Resources Board, declined to comment on whether officials were concerned that the drop in emissions would impact revenue. 

It’s not clear yet how much California’s emissions have fallen. Weekly production at oil refineries—the largest industrial source of emissions—has plunged by one third since this time last year, according to the California Energy Commission. The International Energy Agency recently estimated overall U.S. emissions fell 9% in the first quarter.

The pandemic has already wreaked havoc with the secondary market for permits. After the lockdown began, prices on the market crashed, bottoming out at $12.50 per ton, well below the auction floor price of $16.68.

But the sell-off wasn’t triggered by California companies that no longer needed allowances, said Melina Bartels, a power market analyst for BloombergNEF. Instead, it was banks and other financial institutions that participate in the market purely for profit. As stocks tumbled worldwide and oil prices plummeted, they needed money and dumped their allowances.

“The only reason people are ditching credits right now is if they need cash immediately,” Bartels said.

Now prices on the secondary market are hovering just below the floor, and environmentalists worry the low emissions will sap demand in the upcoming auction.  

Long-Term OptimismAnalysts aren’t worried that the next auction will be a complete bust or that the market itself is in danger. The rising price floor is attractive to investors, and the state hasn’t stepped back from its ultimate climate goal: to be carbon-neutral by 2045, pulling more global warming gases from the atmosphere each year than it puts in. Cap-and-trade is essential to achieving that.

“With very strong political commitment, there’s going to be an appetite for these allowances,” Busch said. “I don’t think this is catastrophic, either for the cap-and-trade market or the larger policy efforts.”

Even though all government programs will be squeezed this year, as the pandemic puts new pressures on the budget, Roedner Sutter at the Environmental Defense Fund said the state should keep funding climate-action efforts such making homes more energy efficient, work that cuts emissions while providing jobs.

“Those initiatives are the kinds of things that will help the economy recover,” she said. “The state will have to look at those priorities as they think about recovery.”