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Debra Kahn – ClimateWire – March 26, 2010

Federal plans on how to treat carbon allowances in a cap-and-trade market appear more likely to influence the final shape of California's system than an internal state report developed by a panel of economists.

Gov. Arnold Schwarzenegger (R) sent a letter to California Air Resources Board Chairman Mary Nichols on Wednesday arguing that the state should give most allowances away in the early years of a cap-and-trade program and allow generous use of offsets.

Schwarzenegger stepped in the day after the Economic and Allocation Advisory Committee (EAAC), a state-appointed committee of economists, recommended auctioning nearly 100 percent of allowances.

"I strongly support a more carefully phased approach to development of an auction system, beginning with a very small percentage of allowances subject to auction," he wrote. Giving away more allowances would also be in line with federal developments, he said.

"As we have discussed many times, California's goal is to implement A.B. 32 in such a way as to mesh our program as seamlessly as possible into a comprehensive national strategy."

State officials close to the process confirmed Schwarzenegger’s stance. They said they would take the economists' findings into account, but would likely decide to start with a large proportion of free allowances, as the House-passed bill by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) would do.

"The details are extremely critical and we believe that EAAC's recommendations provide a very thoughtful proposal under the most ideal circumstances," said California EPA spokeswoman BreAnda Northcutt. "However, auctioning the majority of allowances at the initial start of the program is probably not a feasible option."

What happens in Washington is 'crucial'

ARB spokesman Stanley Young echoed Schwarzenegger. "The crucial determining factor here is what's happening in Washington, because our goal is to develop a program that will meld seamlessly into a federal program," he said. "This is about considering the future in terms of how California can become part of a comprehensive national program."

Carbon traders welcomed Schwarzenegger's intervention, saying it would fit better with federal plans and be better for the economy.

"Contrary to those who opine from ivory towers, the governor seems to, instead, favor a solution that gradually reduces emission allocations and allows for the greater use of high quality offsets," said Josh Margolis, CEO of brokerage firm CantorCO2e. "Doing so minimizes costs, maximizes results, and greens the economy."

The committee, appointed by the state EPA and the California Air Resources Board in May 2009, includes some of the country's best-respected economists and environmental policy experts (ClimateWire, Jan. 11).

The group recommended returning about 75 percent of the auction revenues to consumers, either through tax cuts or direct payments, and investing 25 percent in emissions-reduction technologies. "In contrast with free provision, auctioning yields revenue and thereby can reduce the extent of the government's reliance on ordinary taxes for financing expenditures; this can help reduce the overall costs of AB 32," the group wrote.