California energy users have a shock in store between 2015 and 2020, warns a new analysis by ICF International.

That’s when California’s greenhouse gas law, the Global Warming Solutions Act of 2006, really bites. Popularly known as AB 32, the law requires progressive reductions in carbon dioxide and other gases associated with global warming, aiming to cut the state’s emissions to their 1990 level by 2020.

While ICFI’s exact estimates are proprietary, ICFI Vice President Steve Fine says the range of energy price increases that the analysis foresees is, “by all definitions, significant.”

The factors pushing prices up include a lack of alternatives or technology for some sectors to cut emissions, and substantial questions about whether some measures that AB 32 supporters are counting on will actually produce hoped-for results.

How It Works

AB 32 is arguably the world’s first multi-sectoral greenhouse reduction program, Fine said. Under it, the California Air Resources Board has set limits for each major sector, with a goal of reducing greenhouse gas emissions to 1990 levels by 2020. The sectoral allowances are then divided among all the individual facilities. Owners must have or buy allowances for each ton emitted.

Compliance with the law starts in 2013 for electric power and major industrial emitters, which account for about 160 million metric tons of carbon dioxide equivalent each year. Compliance was supposed to begin this year, but setting rules proved sufficiently complex that it was delayed.

In the first two years, ICFI experts say the means for compliance are fairly straightforward, including fuel-switching, building lower-emitting plants, and contracting for lower-carbon generation from out of state.

But in 2015, other sectors accounting for another 230-240 million metric tonnes (MT) CO2 equivalent (CO2e) come under the cap, including transportation, natural gas and related fuels, and smaller industrial emitters, so 84% of the state’s roughly 460 million MT CO2e annual emissions are covered. Transportation alone accounts for 38% of state GHGs, according to state figures.

Once those other sectors are added, said ICFI Vice President Chris MacCracken, sources of emission reductions are far less certain and certainly more expensive. Transportation and smaller industrial sources in particular “don’t have a good source of lower-cost emission reduction opportunities,” he said.

They will need to meet standards primarily by buying offsets, certified carbon reductions from projects elsewhere. CARB has approved “protocols” for offsets from forestry, agricultural methane reduction, and ozone-depleting substance destruction, and is considering more. But ICFI analysts say they don’t see enough of those projects to meet anticipated demand, even though no emitter can use more than 8% offsets for compliance.

Market Response Questioned

That scarcity will tend to drive up offset prices, despite CARB’s legal liability provisions for offsets that may also make them dicey purchases. An anticipated Western Climate Initiative offset market may also go glimmering as most western states drop out of the controversial WCI.
Adding to the uncertainty, the California plan also depends on several complementary measures to achieve its objectives. One, the low-carbon fuel standard, has just been rejected by a federal court as interfering with interstate commerce, and its legal future is uncertain.

For the electricity industry, the state also has a renewable portfolio standard of 33%, and that requirement must be met separately from AB 32.

Moreover, CARB has ruled that emissions from electricity imported from out of state also must be counted for AB 32, assigning an average to spot power that isn’t specifically sourced. That process is designed to limit “leakage,” where emissions drop only because generation is sourced out of state. But the ICFI analysts said it isn’t clear the rules are going to work as intended.

Overall, said MacCracken, CARB assumes a base of 360 million MT CO2e to be cut to 311 MT by 2020, but that base assumes about 41 MT reductions from parallel measures like the RPS and low-carbon fuel standards.

If those measures don’t work other sectors would be left to reduce further to get to the 90 million MT reduction total, and that would drive allowance prices and the cost of compliance far higher.

A 2010 CARB study estimated AB 32 allowances would cost $21/MT and would not lower the state’s annual GDP. The plan includes a reserve of allowances that can be auctioned if costs skyrocket.