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How California’s cap and trade market undermines environmental justice

Last week, Senator Bob Wieckowski (D-Fremont) and Senate President pro Tempore Kevin de León (D-Los Angeles) gave a press conference about a new bill, SB 775, aimed at changing California’s cap-and-trade scheme. The proposed bill would start a new cap-and-trade scheme in 2021 that would include no offsets, no free pollution allowances, and a per-capita dividend.

Vox journalist David Roberts has written a very useful overview of SB 775. It’s safe to say that Roberts likes SB 775:

I gotta say, if this thing passes, it will be close to a miracle. To my eye, it elegantly balances technical and political considerations in a system that is simple, reliable, and sturdy.

EDF, on the other hand, doesn’t like it. EDF’s Erica Morehouse argues for keeping California’s cap-and-trade scheme:

Rather than scrapping the current system and starting over with an unproven approach, the state should build on success, keeping what is working well while strengthening the program by doing more to address local air pollution and environmental justice.

Meanwhile, a press release from four environmental justice groups supports SB 775:

The California Environmental Justice Alliance, Asian Pacific Environmental Network, Center on Race, Poverty & the Environment, and Leadership Counsel for Justice and Accountability are pleased to see such a bold vision for a more equitable, effective carbon pricing program in California released today through SB 775. We thank Senator Wieckowski and Senate pro Tem de León for their leadership.

California was one of the first states in the USA to pass legislation that includes a legal definition of environmental justice. In California, environmental justice is defined as follows:

“environmental justice” means the fair treatment of people of all races, cultures, and incomes with respect to the development, adoption, implementation, and enforcement of environmental laws, regulations, and policies. (Government Code Section 65040.12)

In a recent paper, Patrick Bigger, a Senior Research Associate at Lancaster University, looks at environmental justice and at how fairness is regulated in California’s current cap-and-trade carbon market. It is published as a chapter in a book edited by Stephanie Paladino and Shirley J. Fiske: “The Carbon Fix”.

California’s Global Warming Solutions Act

California launched its cap and trade scheme in January 2013. It’s part of AB 32, the California Global Warming Solutions Act of 2006, and it runs until 2020. AB 32 is just 13-pages long, but as Bigger points out, the market-based governance mechanisms are complex:

While the basic principles of carbon market design are fairly straightforward, the nuances in rule-making are multitudinous, the negotiations over those nuances protracted, and the number and types of interlocutors trying to influence all of the moving parts of he system are vast.

Bigger’s analysis is based on 14 months of fieldwork in Sacramento, California. He points out that California’s carbon market may have started with the intention of making “polluters pay”. It’s based on the economic idea that putting a substantial price on carbon would drive down emissions of greenhouse gases and other pollutants. But the reality is that “pay to pollute” is the operating principle of California’s carbon market. Bigger writes that,

Environmental justice organizations have long feared such an outcome, believing that emissions will not be avoided and that polluters can eschew responsibilities to impacted communities through accounting tactics and the outsourcing of reductions with offsets.

Bigger found that the concerns of environmental justice organisations “were sidelined through the regulatory decision to conduct a specific kind of carbon pricing”.

AB 32 requires California’s Air Resources Board to convene an Environmental Justice Advisory Committee. Earlier this year, the Environmental Justice Advisory Committee put out a declaration specifically opposing carbon offsets:

the Environmental Justice Advisory Committee stands with communities around the world in opposition to carbon trading and offset use and the continued over reliance on fossil fuels

The fact is that offsets allow pollution to continue in California, not just of greenhouse gases but of other pollution. Many of the most polluted cities in the USA are in California. And landfills, oil refineries, rail yards and other polluting facilities are concentrated in low-income communities and communities of colour.

Not all claims to fairness are equally influential, Bigger writes. Industrial lobbyists succeeded in reducing arguments about fairness to cost reductions for industry. California gave away many more allowances than were needed to ensure a high price for carbon.

Bigger looks at three key decisions that were influenced by claims about fairness, outlined briefly below.

Over-allocation of pollution permits

The Air Resources Board allocates pollution permits to regulated industries, after emissions levels have been determined and a cap set. Bigger found that this was the most divisive and important decision in the design of the market.

Industry groups argued that pollution permits should be handed out for free. Environmental justice groups and academics argued that pollution permits should be auctioned.

Industry argued that if companies had to pay to pollute in California, they would relocate to avoid extra costs. This relocation is called “leakage”. In 2012, the AB32 Implementation Group, an industry group urged the Air Resources Board to,

immediately amend the regulation so that all industries will be allocated 100% of allowances thereby eliminating the auction. This is reasonable given that there is no strategy to address leakage and job loss created by an auction.

ARB developed what Bigger calls “convoluted formulas to detemine how much pressure from imports each industry was under”. ARB then handed out free permits based on the risk of companies in California being undercut by companies operating in jurisdictions without climate change legistion.

In the first compliance period (up to the end of 2014), the majority of regulated industries received about 90% free permits. Continued industry lobbying led to increases in trade-exposed industries, from breweries to natural gas suppliers. Bigger writes that,

This reduced the number of allowances auctioned by more than a quarter in 2015, and eliminated the need for auction participation from some industries through 2020, the entire design life of the market. Under current regulations, ARB is projected to give away over 700 million [tonnes of] CO2 worth of allowances over the life of the market just to utilities, which is roughly the equivalent of the climate pollution generated by Germany in 1 year.

Resource shuffling

Resource shuffling occurs when a company that imports power from outside California changes its suppliers to low carbon sources. A California utility could, for example, buy hydropower from Ontario instead of coal-fired power from Arizona. The coal power would, however, be sold elsewhere, resulting in no net emissions reductions. About 30% of California’s energy is imported.

In the initial regulation, resource shuffling was banned. Power generators and importers lobbied against this ban. As a result, ARB adopted a series of “safe harbor” provisions. A 2013 paper by Danny Cullenward and David Weiskopf of the Stanford Law School found that these provisions could result in leakage of up 197% of emissions reductions mandated by AB32.

Offsets and more offsets

Offsets can be used to meet 8% of a regulated company’s emissions target. While this may not sound like much, Bigger explains that,

What this means over time – as the cap is lowered – is that roughly half of the mandated aggregate emissions reductions could come from sources outside of the cap, because the overall cap is scheduled to decline by about 16 percent over the course of the program. This raises concerns about polluting industries simply buying their way out of making serious pollution reductions, and the attendant health impacts of the co-pollutants in industrial processes.

The 8% offset figure is double the limit that the Air Resources Board initially proposed in 2009. The decision to increase the limit on offsets followed lobbying by groups like the California Chamber of Commerce.

While industry and BINGOs like EDF are in favour of offsets, environmental justice groups oppose offsets. In their press release about SB 775, environmental justice groups explain that,

The current cap and trade system has significant environmental justice flaws that our members, our alliance and leading researchers have highlighted for many years. Pollution from large greenhouse gas emitting facilities disproportionately impacts people of color. More than half of the greenhouse gas sources covered under cap and trade, including 15 of 20 refineries in the state, are located in or within one-half mile of a disadvantaged community. These facilities do not just release carbon dioxide; their emissions are strongly correlated with a range of pollutants that harm health and quality of life. Current features of cap and trade, like offsets and an oversupply of allowances, allow facilities to comply with legal requirements without actually reducing the pollution coming out of their smokestacks.

The inclusion of REDD offsets in California’s cap-and-trade scheme has been discussed for several years. Inclusion of REDD offsets would allow polluting companies, in particular fossil fuel corporations, to greenwash their operations and would delay much needed emissions reductions in California.

Bigger argues that companies appropriated the language of fairness to argue against California’s regulations that were designed to constrain their polluting operations. He concludes his paper with a plea for direct regulation:

It seems that transformative carbon reduction impacts will more likely be achieved via direct regulation, such as renewable energy standards and other policies that are described as merely ‘complementary’ to the carbon market.


Full disclosure: This post is part of a series of posts and interviews about California’s cap-and-trade scheme, with funding from Friends of the Earth US. Click here for all of REDD-Monitor’s funding sources.

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  1. California’s AB32’s REDD+(REDD) offset credits are not only bad for California & the climate but also endanger forest peoples & Indigenous people. REDD increases market interest, land speculation & land grabbing of remote forests but without REDD requiring the recognition & enforcement of forest people’s resource & human rights. The world’s unprotected forests and their peoples primarily remain because the lumbering of these forests were not able to produce net profits or because in rare instances the inhabitants had sufficient land tenure (LT) and human rights (HR) to protect their forests and themselves. REDD is creating economic incentives to now make these forests and their peoples more profitable to exploit, but without requiring the enforcement of the rights that will protect all forest peoples, their forests & create well regulated markets. REDD projects without requiring these rights will be more prone to carbon sequestration reversals, deforestation leakage to other Jurisdiction, social and political damage and risk, and will be less transferable. Nevertheless carbon credit entrepreneurs, Government entities and NGOs are promoting REDD without first requiring the enforcement of these rights in the world’s last remote forests.

    The current REDD agreement & its social safeguards do not require the recognition and enforcement of customary and statutory resource and land tenure, and human rights for forest peoples prior to REDD funding or payment, they should. All the social standards cited by REDD are ultimately qualified by nonbinding terms such as respect, promote, support, address or recognize, none require resource and land tenure and human rights prior to the program’s involvement.
    Given the history of land tenure and conflict in most Tropical countries with large remaining forests, it is implausible and inefficient to believe that rights being “requested” at the country level, per the current REDD agreement and standards, will ensure social safeguards and prevent political risk. After remote forests & their peoples are targeted by REDD without requiring these rights, it will be a rearguard nightmare to try to stem their suffering, dislocation & acculturation.

    One of the most cost effective methods of ethically sequestering carbon, REDD’s main goal, is by recognizing and enforcing the land & resource tenure of forest people. A. Agrawal’s study “shows that the larger the forest area under community ownership the higher the probability for better biodiversity maintenance, community livelihoods and carbon sequestration.” “The growing evidence that communities and households with secure tenure rights protect, maintain and conserve forests is an important consideration for the world’s climate if REDD schemes go forward, and even if they do not.” according to Agrawal, A. (2008) ‘Livelihoods, carbon and diversity of community forests: trade offs and win wins?’

    World Bank SOCIAL DEVELOPMENT WORKING PAPERS Paper No. 120/December 2009 stated, “…the cost range of recognizing community tenure rights (average $3.31/ha) is several times lower than the yearly costs estimates for …. an international REDD scheme ($400/ha/year to $20,000/ha/year).” “…a relatively insignificant investment in recognizing tenure rights has the potential to significantly improve the world’s carbon sequestration and management capacity…, prioritizing policies and actions aimed at recognizing forest community tenure rights can be a cost-effective step to improve the likelihood that REDD programs meet their goals.”
    The promotion of REDD without requiring LT & HR prior to funding or payments makes the vast majority of forest people & their forests much more endangered. This is noted by Jorge Furagaro Kuetgaje, climate coordinator for COICA, the Indigenous People of the Amazon Basin, “For us to continue to conserve the tropical forests … we need to have strong rights to those forests. Death should not be the price we pay for playing our part in preventing the emissions that fuel climate change.”

    Tropical forested countries also have very poor land tenure rights enforcement records for forest people. “Living on Earth” radio reported, that, “governments own about 75 percent of the world’s forests, less than ten percent legally belong to communities. In Indonesia, 65 million people live off forests, most of them have no official rights to the land they consider theirs. In the eyes of the Forest Ministries, they’re squatters occupying a national resource”.

    The human rights and land tenure enforcement record of tropical forested countries is alarming. Global Witness’s Nov. 30, 2015 Press release stated, “At least 640 land and environmental activists have been killed since the 2009 climate negotiations in Copenhagen – some shot by police during protests, others gunned down by hired assassins.” Global Witness also stated, “Most murders occurred in Latin America and Asia with far fewer reported in Africa, however this may be (due) to a lack of information…justice is rarely given to murder victims. Killers are rarely brought to trial and often acquitted when they are. In Brazil, fewer than 10 percent of such murders go to trial, and only 1 percent see convictions.” Last year, 61 land rights campaigners were killed in Brazil, the highest level of violence since 2003, according to the Pastoral Land Commission, an advocacy group linked to the Catholic Church. Therefore REDD should be amended to stipulate the recognition and enforcement of forest people’s resource, land tenure and human rights prior certifying or funding of REDD offsets. If REDD is not amended to require these rights it should be abandoned rather than endanger forests & their people.

    The preceding comments and recommendations focused narrowly on the need for binding social standard prerequisites, and not on efficacy of carbon offsets which is also problematic. (see Methodological and Ideological Options, Comprehensive carbon stock and flow accounting: A national framework to support climate change mitigation by I. Ajani et al., Ecological Economics 89 (2013) p61–72. Untangling the confusion
around land carbon science and climate change mitigation policy by Brendan Mackey et al., NATURE CLIMATE CHANGE | VOL 3 | JUNE 2013 |