May 13, 2015 – Volume 16, Issue 11

IN THIS ISSUE

Flanigan’s Eco-Logic

CA Climate Leadership at NACM

Pentagon’s Grim Realities

Carbon Elasticity of Gas Prices

Green Bonds

Allocating GHG Reduction Funds

Environmental Justice

CA Takes Action to Succeed

Flanigan’s Eco-Logic: Aspiring to Succeed

This past week our colleagues at Climate Action Reserve (CAR) put on a valuable conference in Los Angeles, “Navigating America’s Carbon Markets (NACM).” CAR is the leading certifier of GHG offsets in the U.S. and its expertise is recognized worldwide. The 13th annual NACM conference was not only informative, but also served as a group affirmation of the need to achieve grossly ambitious goals, and most importantly, our ability to do so.

California’s carbon mandate is an imperative, driven by the will of the people and codified in the landmark California AB 32, the Global Warming Solutions Act of 2006. It seemed impossible a few years back, requiring

transformations in size and scope unbelievable to all. But today and thanks to many of the conference attendees, the State is on track to meet the “stretch goal.” I’m inspired by the depth of action on carbon mitigation.

Without question, California is way ahead of the nation… pivoting quickly from mandates to markets. Sure, we spar with Massachusetts and its 2008 Green Communities Act for prominence (and its funding of the Regional Greenhouse Gas Initiative – RGGI); now Oregon is revealing similar legislative aspirations. These are the cutting-edge initiatives for greenhouse gas mitigation that may literally save the world for mankind as we know it. This special issue features the surge of power and sophistication in the carbon markets.

At breakfast I meet a forester selling credits. To his left is an official from California’s Metropolitan Water District talking about the water, energy, carbon nexus. I meet a man from the U.K. whose firm sells offset insurance. Over orange juice, we talk trees and water, their links to carbon and climate. We talk science, climate measured in 30 – 100 year trends while weather changes hourly. We debate offsets and allowances.  At the awards ceremony, CAR’s Executive Director, Gary Gero, features the project that generated the most credits in 2014, a 230,000 acre forest in Michigan that received 2.1 million offsets.

California is the seventh largest world economy and arguably the clean-tech capital of the world. We have the most advanced carbon markets in the country. And the eyes of world are upon us. We learn that China is developing a national emissions trading program. South Korea has launched a program and recently Climate Action Reserve sent a delegate there.

While there is so much to do, and the challenge remains daunting, great progress is being made. California is on a roll. We have a governor who gets it, and a legislature guided by many shining stars, backed by determined constituents, and NGOs. We have academia in hyper mode, and industry poised to bankroll and commercialize all that is new and efficient.

Our state’s $40+ billion dollar industry is growing fast… and will succeed. We will hit our targets thanks to visionary policy soundly matched with ingenuity and technological supremacy. But the challenge is double daunting: To fulfill our global mission, we cannot solely get our own house in order. Now we need to drive down the costs of this transformation, so that other nations will logically follow suit. We can’t expect developing countries that have been in abject poverty to forego growth. GHG solutions need to be scalable, exportable, and affordable.

Quote of the Week

“If you don’t make goals aggressive enough, they’re not worth fighting for.”
   – Len Hering, Rear Admiral, USN (Ret.)
   Executive Director, Center for Sustainable Energy

California’s Climate Leadership at NACM

California is a microcosm of some note, responsible for 1% of global GHG emissions. And now we ratchet down to 1990 levels, 431 million metric tons. At that time there were 29 million Californians (now our population is 37 million) and a gross state product of $1 trillion (which by 2014 had more than doubled to $2.2 trillion), 13% of the U.S. Gross Domestic Product.

California Jerry Brown kicked off the NACM conference, and with a bang. Without notes, he was strong and articulate. He gets the climate issue and our need to respond in full force. And he announced a new Executive Order, setting an interim goal on the path to 80% below 1990 levels by 2050 specified in Governor Arnold Schwarzenegger’s Executive Order. Brown says we have to act now, not to let tipping points pass us by. The new Executive Order, announced at the Biltmore Bowl’s podium on Wednesday, mandates a 40% reduction by 2030.

Former SCE President, Long Beach Mayor Bob Foster moderated a panel of California’s climate chiefs: He began with a quote on the art of leadership: “The art of leadership is to keep the 50% of the people who oppose you away from the undecided!” His levity and depth of experience as utility CEO and Mayor of Long Beach, were key ingredients in drawing out the key features of California’s climate leadership, and the State’s success to date.

Secretary John Laird of the Natural Resources Agency has a top job and a tough job, managing the Agency’s 25 Boards and Commissions, including the California Energy Commission. A former Santa Cruz mayor and three-term assemblyman, Secretary Laird was appointed by Governor Brown in 2011 and has made responding to climate change his primary mission. Michael Picker is the new President of the California Public Utilities Commission. Picker described the CPUC an “an infrastructure financing agency…” enabling large utilities’ plans, financing, construction, and ultimately guaranteed recovery of their investments and profits from the operation of the infrastructure. Matthew Rodrigues is the Secretary of “CalEPA.” In 1991, California’s environmental authority was unified in a single cabinet level agency. Its mission is to restore, protect and enhance the environmental to ensure public health, environmental quality, and economic vitality. CalEPA is at the hub of California’s carbon market: CalEPA disburses Cap and Trade funds.

There have been huge gains in energy efficiency in California. Our power rates are in the top quartile nationwide, but our bills are in the lowest quartile. There are also huge gains being made to clean up the power system. Fully 18 GW of renewables has been contracted to meet the State’s goals… nine times the peak capacity of the recently retired San Onofre Nuclear Power Station (SONGs). Of this renewable capacity, 11 GW has been connected and is online.

The renewable market is maturing, with prices falling precipitously. Large-scale solar can produce 4.7 cent/kWh power; wind costs 3 cents in the Midwest. A 300 MW solar plant is being built on spec in California – the first major renewable of its kind built without an off-taker contract.  But President Picker pointed to the limited role of the power system to cut carbon. Since only 20% of California’s emissions are from electricity… the power sector alone can’t meet GHG mitigation goals. He believes we’ve got to focus on the 40% of emissions that come from transportation, to look at fuel switching, and to examine the other 35% of emissions from the built environment.

The Pentagon’s Grim Realities

DOD Climate Change Roadmap

The carbon movement, now an industry with commodities and markets, has evolved from Al Gore’s grossly inconvenient truth and THE Talk, straight to the Pentagon. Retired Admiral Len Hering is a tall man and has become a profoundly important voice in the climate space. He talk was forceful and articulate.

“We’re doing a terrible job of protecting what we’ve been given. What will our zoos look like for my grandchildren?” Given the pace of endangered species and the threat of their extinctions, he fears zoos will have to expand radically to house threatened populations.

Hering’s view of the state of the planet was even more sobering, especially how it relates to international tensions and security. Will the past century of wars for resources be eclipsed in magnitude by resource conflicts in this century? Basics are at play. For instance, fish populations are 3% of what they were 50 years ago… while 70% of the world’s population gets primary protein from the sea. And why is this? One reason is that the oceans have served as waste baskets, the Great Pacific Garbage Patch (also known as the Pacific Trash Vortex) is – a huge swirling mass of garbage bounded by the North Pacific Subtropical Gyre – is now twice the size of the State of Texas.

The challenges are doubly daunting: By 2050, as we seek to lower greenhouse gas emissions by 80%, there will be 2.4 billion more people on the planet, another China and India added to our global population. How do we feed our collective thirst for resources? One way is to reduce waste. Hering implores that right now, the U.S. throws away about 40% of the food we grow, water, harvest, process, package, deliver, and “consume.” That’s more than all of Europe’s daily consumption.

In terms of water, he noted, “We all know that we are in a world of hurt.” We waste 40% of the water too. We’re experiencing feedback loops exacerbating the problem: Drought leads to less hydroelectricity, replaced with fossils. Hering says it’s time for an adult conversation. He fears great wars and conflicts over resources in the next century. He is bold, direct, and truthful, reflecting that most of his 33-year career in the military was spent securing natural resources.

Late in the day, Jonathan Parfrey of Climate Resolve, added a local context to Hering’s stark reality, presenting data from UCLA’s “dynamic downscaling” modelling work. Locally, experts anticipate a 3.5 – 5.5 degree F temperature rise in the Los Angeles area. Cities like Woodland Hills will see more than 80 days each year of temperatures above 95 degrees.

The Carbon Elasticity of Gas Prices

Severin Bornstein, a professor at the Haas School at UC Berkeley, was asked to focus on low gas prices, elasticity, and the effect on carbon markets. He explains that excess production of 5 MBD (million barrels a day) caused the big dip in oil prices nationwide. So how has this affected carbon?

While California’s gas prices are 95 cents above the national average, Bornstein says that only 10 cents of this is due to the State’s Cap and Trade program. He finds price elasticity in the 0.1 – 0.2 range for gasoline, meaning that for every 10% drop in price, we see a 1 – 2% increase in use. High prices are largely due to California’s “summer blend” of gasoline and the Torrance refinery fire which took it out of production.

Digging a bit deeper, transportation is responsible for 170 MMT per year in California. Therefore even a 20% drop in fuel prices will only cause driving miles to increase emissions by (about 7 MMT per year) or 41 MMT over the next six years. The effect, concludes Bornstein is rather small. In fact, the major factor driving emissions trends down and up is the macroeconomy, growth driving up emissions.

Another key point that Bornstein that is that there is a lot of cheap oil out there. While the marginal cost of oil may be $100 per barrel, 80% of the oil out there can be produced for $30 or less. Thus, perversely, conservation of oil will send drive down prices sending signals to the market at odds with carbon mitigation. Lower prices will actually increase demand, especially in the developing world.

At the Haas School at UC Berkeley, Bornstein tells his students to innovate and to find alternatives to gasoline. They’ve got to be cost-effective. Yes, some $3.00/gallon solutions will be viable. But in order to transform our society, to save the world, and profit, Bornstein believes that his students will need to find solutions to climate change that cost less than $1.50 per gallon. That’s the displacement cost. The electricity equivalent might be 5 cents.  A policy option is to shore up gas prices with a GHG tax… like $100 per tonne, about $1/gallon.

To me, what was most profound about Bornstein’s strong statements about the need for California’s leadership. We are on track, but we mustn’t buy our way out of the situation. Why? We need our solutions to be easily implemented worldwide. There need to be new technologies that allow developing countries growth in quality of life, but that are sustainable and affordable. Only then can we as a global society stave off the harshest effects of climate change.

Green Bonds

David Nahai is a moderator extraordinaire. The former General Manager for LADWP led a session on green bonds with a great deal of legal and financial depth on the bench. He began with a parking garage that had reportedly been funded with green bonds. “But is that crossing a line,” asked David? Parking garages hold cars that are prime agents in polluting the planet. How can they be green? What a grey area.
Turns out that there is a lack of clear definition of green bonds, and a lack of standard by which to rate them. But they are one of the fastest growing financial products: In 2014, 73 green bonds were issued to the tune of $40 billion… that’s up from $13 billion in 2013. There are at least three types of green bonds, corporate (Toyota issued one), project bonds (eg. wind farms), and high-yield  bonds, better known as junk bonds. The green bond market is unregulated, without a clear framework, there are vast discrepancies in products out there.
So what’s the advantage of these bonds? David Nahai presents a new water fund that he manages. Its investors need 15 – 20% returns. Green bonds are being issued in the 1 – 2% range. They are long-term, stable, low-cost capital for those investors who are extremely patient. We learn that nuclear power is not eligible for green bonds, and that they need a link to environmental value, though not necessarily linked to carbon.

Allocating GHG Reduction Funds

California’s Cap and Trade system now covers 85% of all GHG emissions. It provides for free allowances for certain industries, like utilities, and offsets for industries and others that can’t comply. Offsets can be bought at quarterly auctions. Each metric tonne of CO2 has to be covered. Revenues go to the Greenhouse Gas Reduction Fund.

CARB is the hub of cap and trade. To manage the Fund, CARB and others developed the first Three-Year Investment Plan. It guided the flow of funds through a dozen different state agencies. Now a second Three-Year Plan is in the works, getting ready for robust public comment. So far $370 million has been awarded. These awards will decrease emissions by 4.6 MMT over the funded projects’ lives.

The Fund now has $980 million to disburse. Special allocations carve out percentages of the auction revenues. High speed rail gets $250 million, sustainable housing gets $200 million, low carbon transportation fuels gets $230 million, weatherization $75 million, and forests $42 million. Of the total pie, 60% of auction revenues is already allocated, with 40% each year for the legislature to debate and fund. Reportedly, demand for the Fund is 2 – 7 times what is available.

Keeping an eye on the allocations is important for Southern California, noted Jonathan Parfrey of Climate Resolve. We have a recent precedent. ARRA stimulus funds were not fairly allocated. The closer you were to Sacramento, the better. In fact, Northern California got $2.70 per person, Central California got $1.71, while Southern California got $0.90 per person. The Annenberg Foundation is now helping SoCal communities frame up proposals for GHG Reduction Funds.

Environmental Justice

Pollution over Los Angeles

Cap and Trade is one of a number of mechanisms with which the State of California is reducing emissions. It’s exciting… now generating about a billion dollars of annual revenue. The fund is expected to grow to $3 – 5 billion in revenues per year in the next few years. Others predict as large as a $30 billion annual market as goals become that much more difficult to achieve.

This auction proceeds is where the action gets dicey. Naturally everyone wants to fund a favored project. Jerry Brown has carved out 25% for high speed rail. How else can the funds be used? Can lives be transformed with these funds? Can disadvantaged youth be trained?

CARB Commissioner Hector De La Torre has roots in South Gate. There he was a teacher, then councilmember and mayor. From 2004 – 2010 he represented the 50th Assembly district in Sacramento. In 2011, Governor Brown appointed him to serve on the commission of the California Air Resources Board. His home and base has been and still is South Gate.

De La Torre is articulate and direct: His community has been subject to air pollution from the 710 freeway, the rail lines, industry, etc. De La Torre is dedicated to his constituents and fellow Angelenos. He’s been helping disadvantaged for years… promoting health care, financing energy efficiency programs, and advocating cleaner vehicles, solar, and more.
AB 32 was a profound piece of greenhouse gas legislation. For De La Torre’s community, SB 535 was a game changer. And it’s unique in the world… a bill requiring the mitigation of environmental damages in adversely impacted areas. Specifically, the bill requires that 25% of Cap and Trade funds “benefit” disadvantaged community… 10% must “directly benefit” those. The target areas are based on California’s Environmental Screening Tool. Its multiple parameters maps impacted area. Then SB 535 can fund basic goods like single and multifamily weatherization, urban tree planting, transportation options, and affordable housing.
SB 535 added an environmental justice angle to AB 32. SB 535’s successful passage is attributed to the smart works of “the Quad,” four anchor organizations including the Greenlining Institute that made the bill a reality. The Quad brought together a robust coalition of 200 organizations. It passed in 2012, authored by Senator DeLeon to address “the climate gap,” and the regressive impacts of climate change.
Greenlining’s director, Vein Tran, is an attorney with clear passion, capability, and resolve. She called SB 535 the “biggest environmental justice fund in history.” It is broad and bold, promoting real benefits and job training. It allows for free bus passes for seniors and students, free energy efficiency and even solar panels for low income homeowners, with a focus on job training and career development.

California Takes Action to Succeed

Throughout the conference was an assumption: Clear and simple… that we will achieve our greenhouse gas mitigation mandates. Big, game-changing mechanisms such as the Renewable Portfolio Standard, and more recently Cap and Trade, are making a big difference and provide market signals and mechanisms. The California cap is 2,508 MMT for the 2013 – 2020 period. The Cal EPA has the job of managing the auctions and spending the money.
The Renewable Portfolio Standard requires our power companies to provide 33% renewable power by 2020. The utilities have already achieved the 20% milestone There have already been 12 Cap and Trade auctions. The last one was with Quebec and brought in $650 million in revenue for California. Governor’s ZEV action plan calls for 15% of all new vehicles sold in 2025 to be ZEVs (hydrogen or electric), representing 1.5 million ZEVs by that time. There are already 120,000 on the roads today.
We learn about unprecedented cooperation among state agencies. There is well-coordinated management of the GHG problem and its solutions. The Principals Group, members at the helm of CPUC, CEC, EPA and other agencies focus on accountability and timing. This leadership group was originally formed to develop The AB 32 Scoping Plan. We learn about IETA, an industry group of the major corporate emitters. It brings PG&E, Chevron, Electricite de France, and others together to promote industry solutions to government mandates.
And for many years, deniers sat on the side, abstaining to vote for measures that might mitigate the climate. Now, with the mountain of evidence of climate change and its painful effects – flooding, drought, fires, etc. – a “no-vote” is a vote for investing in disaster relief and other expensive, reactive adaptation strategies. Inaction will be very costly, potentially more costly than preventative action.