Common Tragedies

Thoughts on Environmental Economics

Good point

Posted by Daniel Hall on February 22, 2008

Rich has posted previously on the debate over point of regulation for a cap and trade program in California, pointing out all the administrative advantages that regulating upsteam — near the point of generation — would have.

It looks like someone was listening!* The California Public Utility Commission (CPUC) and the California Energy Commission have now released for public comment their draft set of recommendations to the California Air Resources Board (CARB). (Thanks to loyal CT reader Jeff for the pointer.) They’ve recommended that CARB set up a cap-and-trade program that includes the electricity sector and makes “deliverers” of power responsible for compliance, where “deliverers” essentially means “generators” for in-state electricity and “importers” for out-of-state. (And covering imported electricity is quite important to the environmental integrity of the program: California imports 20% of its electricity, and this electricity accounts for more than 50% (!) of the electricity-sector GHG emissions from the state.)

This is good news, for a couple key reasons: First, it will be far easier to administrate a program where generators and importers are responsible for reporting the source of power and associated emissions than it would be if utilities were asked to do so. (The other main option — a “load-based” point of regulation — would require utilities to perform a mind-bogglingly complicated accounting act to calculate the emissions associated with the power after it had been scrambled onto the grid.) Second, this deliverer-based approach can be turned quite easily into a pure sourced-based (generator) approach if the western U.S. adopts a regional cap-and-trade program similar to RGGI in the northeast U.S.

The decision could be even better, however. First, the proposal from CPUC and the Energy Commission also includes recommendations for the natural gas sector, and here they do not recommend including natural gas in a cap-and-trade program. They do at least acknowledge it should be considered for future inclusion, but for now, while they acknowledge the advantages of incentive-based regulation for the electricity market, for some reason they don’t think it would be appropriate for natural gas. That recommendation is perplexing and disappointing.

Part of the reason that it’s perplexing and disappointing is that the movement in the discussion at the federal level is towards making the point of regulation even further upstream, at the level of the fuel.** For example, the Lieberman-Warner bill has shifted from regulating natural gas emissions at the electricity generator to regulating the processors and importers of natural gas. Shifting the point of regulation to fuel provides broader coverage — since natural gas is used in many places in the economy besides electricity generation — and reduces the number of regulated entities, and hence administrative burden. California could get a more effective and efficient program, as well as one that would be more likely to be inter-operable with a future federal program, if it would move to making point of regulation the fuel producers/processors/importers.***

For further info on point of regulation in a federal program, see this paper for an estimate of the number of emission sources that would likely have to be regulated depending on where you set the point of regulation, and this paper for an analysis of why upstream is best the relative merits of various approaches.

*Admittedly, they probably were listening less to us and more to the Market Advisory Committee and its members, including RFF scholar Dallas Burtraw.

**This works because you can calculate the exact volume of CO2 emissions from burning a given quantity of fuel beforehand. For example, burning a gallon of gasoline always releases 19.6 pounds of CO2 into the atmosphere.

***In reality I don’t get the sense that this has ever been much a part of the conversation in California — they seem intent on getting a cap-and-trade program set up that includes primarily the electricity sector, and then they’ll see how things go and move from there.

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