Acting Locally on Climate: Comments on Richmonds Energy and Climate Plan

Robert N. Stavins Harvard University

April 2012

Acting Locally on Climate: Comments on Richmonds Energy and Climate Plan Robert N. Stavins1 April 2012 Executive Summary
The City of Richmond is proposing to develop a Climate Action Plan and other energy-related policies and action items as part of the Energy and Climate Change Element of the Citys General Plan 2030 update.2 These provisions would have important implications for the well-being of the Citys citizens, as well as broader implications for climate policy efforts being undertaken by the State of California. Unfortunately, certain provisions in the November 3, 2011 Planning Committee resolution would be counter-productive to the broader goals of climate policy, and would rely on a less effective approach to addressing sources of air pollutant emissions than state and regional policies already being pursued.3 Specifically, imposing sector emission targets, local mitigation requirements and prohibiting the use of offsets on sources subject to Californias greenhouse gas (GHG) capand-trade program would: fail to reduce GHG emissions beyond reductions likely under Californias Global Warming Solutions Act (AB 32); increase the cost of achieving the States GHG emission targets; and increase the cost of doing business in Richmond.

The California Air Resources Board (ARB) concludes that increases in localized air pollution attributable to the cap-and-trade program are extremely unlikely. Using GHG policies that conflict with AB 32 cap-and-trade to reduce co-pollutants is not the most effective approach to improving local air quality. Instead, policies that directly target co-pollutants in the locations of greatest concern will be more effective at achieving local air quality goals.

Robert N. Stavins is Albert Pratt Professor of Business and Government, John F. Kennedy School of Government, Harvard University; University Fellow, Resources for the Future; and Research Associate, National Bureau of Economic Research. He is an elected Fellow of the Association of Environmental and Resource Economists, was Chairman of the U.S. EPAs Environmental Economics Advisory Committee, and served as Lead Author of the Second and Third Assessment Reports, and Coordinating Leading Author of the Fifth Assessment Report, Intergovernmental Panel on Climate Change. This list is provided only for identification purposes. This paper was commissioned by the Richmond Chamber of Commerce and represents the views of the author, not necessarily those of the Richmond Chamber of Commerce.
1 2 3

City of Richmond, General Plan Element 8, Energy and Climate Change, Draft, August 2011.

City of Richmond Planning Commission, Planning Commission Resolution No. 11-20, Resolution of the Planning Commission of the City of Richmond Recommending to the City Council of the City of Richmond Adoption of Richmond General Plan, November 3, 2011.

Richmonds Plan and Climate Policy

Through its General Plan update, the City of Richmond aims to make constructive contributions to addressing climate change. However, because GHGs are a global pollutant, Richmond cannot solve the climate problem alone, but must be part of a concerted effort involving multiple cities, states and nations. California has committed to aggressive GHG emission targets through AB 32. Along with providing meaningful reductions in GHG emissions, other states and countries considering similar commitments will be drawing lessons from the outcome of Californias policies and programs. With progress on similar national (and global) climate commitments slowed in the current political climate, it becomes important for California to demonstrate that climate policy can be implemented without significant disruption to and adverse impact on the economy. A key element to achieving these goals is the AB 32 cap-and-trade program proposed by the ARB, which is designed to reduce GHG emissions to their 1990 level by 2020, while providing business with flexibility to achieve reductions at lowest cost. Given the importance of the cap-and-trade program to these environmental and economic outcomes, certain provisions in the Planning Commissions November 3, 2011 Resolution that are inconsistent with this program raise serious concerns. In particular, provisions aimed at imposing incremental requirements on sources already regulated by the cap-and-trade program, including targets, mitigation requirements and limits on emission offset use, pose potential problems to both the cap-and-trade program and the City of Richmond. Proposed GHG Emission Requirements Would Raise Costs While Failing to Reduce Statewide GHG Emissions Several proposed amendments to the draft General Plan included in the November 3rd Resolution explicitly target sectors that are already covered by the AB 32 cap-and-trade program for additional GHG requirements, including emission targets or mitigation requirements.4 While intended to reduce GHG emissions, in fact they would not lead to any change in the States aggregate GHG emissions. Because the cap-and-trade program caps total emissions, any incremental GHG requirement that reduces emissions from one source will inevitably lead other sources under the cap to increase their emissions. 5

For example, the Resolution includes the following amendments to the draft General Plan (underlined): emission reduction target(s) to be achieved by all sectors including industrial and commercial sectors in Richmond; The climate action plan shall include mitigation strategies for addressing the sources of greenhouse gas emissions in the community, specifically within industry and commerce; and Develop and adopt by December 2011 a City Ordinance setting forth requirements for future industrial and commercial land uses to ensure that greenhouse gas and copollutant emissions decrease locally, that emissions will not increase locally City of Richmond Planning Commission, Planning Commission Resolution No. 11-20, November 3, 2011, p. 10.
4

Analogous arguments apply if the state GHG cap-and-trade program overlaps with a federal program. For example, see McGuinness, Meghan and A. Denny Ellerman, The Effects of Interactions Between Federal and State Climate Policies, in Ellerman, Denny, et al. (eds.), Cap-andTrade: Contributions to the Design of a U.S. Greenhouse Gas Program, MIT Center for Energy and Environmental Policy Research, 2008. See also, Goulder H., Lawrence and Robert N. Stavins, Challenges from State-Federal Interactions in US Climate Policy, American Economic Review 101(3): 253-257.
5

This is illustrated in Figures 1 and 2, which show the consequences of a hypothetical cap-and-trade program covering four sources aiming to reduce emissions from 35 (MT CO2e) to 30 (MT CO2e). Under cap-and-trade, when local restrictions are imposed on Plant A, emissions from Plant A are reduced from 9 to 7 (MT CO2e). However, the local restriction has the effect of relaxing requirements on other sources under the cap. In the example illustrated in Figure 2, Plants C and Ds emissions are higher than they would be without the local restrictions (increasing from 4 to 5 MT CO2e.) Consequently, total in-state GHG emissions will be the same (30 MT CO2e in Figure 2) regardless of local regulation of these sources. Figure 1: Four hypothetical sources with total emissions of 35 MT CO2e.

Figure 2: Under a cap and trade program, local mitigation requirements have no impact on total GHG emissions

However, while failing to reduce aggregate GHG emissions, local requirements on sources covered by the cap-and-trade program would necessarily increase the local economic costs of achieving GHG reductions. By mandating certain types of GHG reductions, the City would require that more costly reduction measures be undertaken instead of relying on the least-cost GHG reductions measures that would occur under the cap-and-trade program. These economic costs would likely be born heavily in Richmond, and the additional costs of operating in the City could deter existing businesses from expanding or continuing operations, and deter new businesses from locating in the City.6 These consequences are true
The proposal to create a portfolio of sustainable energy resources to be developed in Richmond would also likely impose additional costs on the Citys citizens, since such resources are likely to be more costly than those being developed to comply with other state-wide requirements, such as the 33% Renewable Portfolio Standard. City of Richmond Planning Commission, Planning Commission Resolution No. 11-20, November 3, 2011, p. 10.
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for any industry interested in operating within Richmond, including the green industries producing clean and sustainable technologies, fuels, vehicles and equipment that the City would like to attract.7 The proposed overlapping requirements also threaten to undermine the efficient operation of statewide trading markets, particularly if measures such as those proposed by the Planning Committee were adopted by other cities in California. Additional restrictions on emissions across many sources could limit the opportunities for trade, limit liquidity, and potentially increase the administrative complexity of compliance for these sources. Proposed Prohibition on GHG Offset Use Could Raise Costs to Richmond Businesses While Achieving No Overall Reduction in GHG Emissions The November 3rd Resolution also contains a provision to prohibit cap-and-trade sources in the City from using GHG credits, typically referred to as offsets.8 However, this prohibition on offset use would not reduce GHG or local co-pollutant emissions. To understand why, it is important to recognize that sources under the cap-and-trade program have two types of permits they can use to cover their actual emissions: the first is a GHG allowance, reflecting allowed emissions under the cap, and the second is a GHG offset, reflecting emission reductions from sources outside of the cap. If offset use in Richmond were to be prohibited, Richmond sources would only be able to use allowances, instead of a mix of allowances and offsets, to cover their actual emissions. Because there are a sufficiently large number of allowances within the entire state, the prohibition on offsets would not pose any constraint on compliance units (allowances or offsets) that local Richmond sources could purchase to cover their emissions. Consequently, local emissions would be unchanged, and the offset prohibition would create no reductions in GHG emissions. However, a prohibition on offset use could have financial consequences for Richmonds businesses, since it would reduce their flexibility to use a mix of allowances and offsets, which bear different financial risks, to meet their compliance obligation.9 As with overlapping emission restrictions or requirements, this type of restriction on how firms can comply with statewide regulations would make Richmond a less appealing place for existing and new business to locate. If the City took the more dramatic step of prohibiting cap-and-trade sources from using both offsets and allowances, these sources would have no means of covering their actual GHG emissions, even if they undertook dramatic and costly mitigation. Consequently, such a prohibition would effectively shut down all cap-and-trade sources in the City, and preclude

7 8

Energy and Climate Change, City of Richmond General Plan Element 8, p. 8.33.

This amendment, proposed by Communities for a Better Environment, would require: That emission credits or offsets related to emission reductions outside of Richmond will not be used for direct emissions in Richmond (in order to ensure that pollution trading will not cause increased greenhouse gas co-pollutant emissions locally and that the benefits of regional, state and federal emission requirements applied in Richmond will accrue in Richmond.) Because offset credits could later be deemed invalid, they face a financial risk that makes their market price lower than allowance prices.
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any from locating in the City in future. Likewise, policies that limit the use of offsets and allowances could effectively mandate certain amounts of local mitigation depending on how these limits were set. As discussed above, such limits would not achieve any reductions in GHG emissions, while increasing the cost of doing business in Richmond.

Policies for Achieving Air Emissions Benefits

By directly targeting the local air pollutants of concern, the existing regulatory framework offers the most effective and certain approach for achieving improvements in local air quality. Using GHG policies to indirectly reduce air pollutants is a less effective approach to improving local air quality, and comes with unnecessarily high economic costs. Because the relationship between GHG and co-pollutant emissions is highly complex, reductions in copollutants from measures aimed at reducing GHG emissions will vary widely. Some may result in high co-pollutant reductions, while others may produce few to no reductions. Policies that directly target air emissions of concern are the best way to improve local air quality. The existing regulatory framework of air district regulation in California is among the most stringent in the country, and has been successful in achieving significant emission reductions and improved air quality.10 Air Quality Throughout California is Protected by Various Regulations that Limit Increases in Air Emissions Regulations are in place to improve air quality, even as many economic and demographic forces, including economic growth and growing demand for particular goods and services, create pressures that would otherwise cause air quality to deteriorate. These requirements are most stringent in regions out of compliance with state and federal standards for criteria air pollutants, such as Californias major urban areas (including the Los Angeles and Orange Counties area, and San Francisco Bay Area.) However, even in regions meeting air quality standards, emission sources are covered by air quality permitting requirements and emission standards, along with the requirements of the California Environmental Quality Act (CEQA). For new facilities or substantial changes to existing facilities, CEQA can require implementation of feasible mitigation measures or alternatives to avoid or reduce significant impacts to air quality from the new project. Thus, local and regional protections from these various regulations complement the cap-and-trade program, which broadly places substantial downward pressure on co-pollutant emissions.

Californias mature air quality program leads the nation in terms of stringency of required emission controls, not only for mobile sources but also for stationary sources. The cap-and-trade regulation will not affect the stringency of these programs. ARB, Proposed Regulation to Implement the California Cap-and-Trade Program, Appendix P, Co-Pollutant Emissions Assessment, P-12.
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The ARB Concludes That Increases in Localized Air Pollution due to Cap-and-Trade are Extremely Unlikely Concerns have been raised that cap-and-trade will have adverse consequences for local air quality. Considering this issue, ARB concludes that, increases in localized air pollution, including toxic air contaminants and criteria air pollutants, attributable to the capand-trade program are extremely unlikely.11 This conclusion was reached after ARB and the California Department of Public Health (CDPH) thoroughly evaluated the health and environmental impacts of a cap-and-trade program to the best of our ability.12 California ARB also responded to a comment letter by Communities for a Better Environment raising concerns about local impacts saying, The commenter provided no evidence supporting the assertion that a cap-and-trade program will exacerbate or widen inequities and previous research suggests otherwise.13 In fact, AB 32 and the cap-and-trade program will most likely result in reductions in local air pollution. These reductions will likely arise not only from the cap-and-trade program, but also from complementary policies, such as the Renewable Energy Standards and the Low Carbon Fuel standard, which will reduce transportation emissions.14 Modifying Climate Policies to Address Local Air Quality Raises Concerns The proposed Planning Commission Resolution suggests that climate policy should be used as a vehicle for improving local air quality.15 However, modifying climate policies to improve local air quality raises several concerns.16 Because the relationship between GHG and co-pollutant emissions varies tremendously across sources, modifying the cap-and-trade program to achieve improvements in local air quality will produce highly uncertain benefits.17 For example, Figure 3 shows that

11ARB

Proposed Regulation to Implement the California Cap-and-Trade Program, http://www.arb.ca.gov/regact/2010/capandtrade10/capisor.pdf, October 2010, Page II-56 Responses to Comments on the Supplement to the AB 32 Scoping Plan FED, http://www.arb.ca.gov/cc/scopingplan/response_to_comments_on_supplement_to_fed.pdf, page 106-63.
12

Responses to Comments on the Supplement to the AB 32 Scoping Plan FED, http://www.arb.ca.gov/cc/scopingplan/response_to_comments_on_supplement_to_fed.pdf , August 2011.
13

Schatzki, Todd and Robert N. Stavins, Addressing Environmental Justice Concerns in the Design of Californias Climate Policy, October 2009.
14

For example: Develop and adopt an ordinance setting forth requirements for future industrial and commercial land use to ensure that greenhouse gas and co-pollutant emissions decrease locally, that emissions will not increase locally City of Richmond Planning Commission, Planning Commission Resolution No. 11-20, November 3, 2011, p. 12.
15

For more discussion, see Schatzki, Todd and Robert N. Stavins, Addressing Environmental Justice Concerns in the Design of Californias Climate Policy, October 2009.
16

Many factors contribute to differences in emission rate across sources, including fuel choice and pollution controls. In addition, the impact of emissions on local air quality depends on geography, weather, and many other factors.
17

co-pollutant emission rates defined as co-pollutant emissions per metric ton of GHG emissions vary substantially across source categories. Moreover, this table captures only a portion of the overall variation, since it does not account for substantial differences in emission rates among the individual sources in each of these categories. Figure 3 also shows that stationary industrial sources tend to have low co-pollutant emission rates compared with other major categories of GHG sources. For example, mobile sources have a much larger co-pollutant emission rate when compared with stationary sources, such as refineries.18 Thus, local GHG mitigation requirements could shift economic activity to other sources that have higher co-pollutant per GHG emission rates. Because the relationship between GHG and co-pollutant emissions varies greatly across sources, a better approach to improving local air quality is through regional policies that directly target these pollutants and take into account the movement of air pollution across municipal boundaries. Currently there are a number of policies aimed at addressing both criteria and toxic pollutants in the Richmond area. The BAAQMD Bay Area 2010 Clean Air Plan is a multi-pollutant plan based on identified measures that achieve emission reductions that are feasible based on many standards such as cost-effectiveness, technical feasibility, public acceptability and enforceability.19 Such policies addressing regional air quality can be complemented with policies aimed at identifying the most adversely affected communities in order to evaluate and reduce health risks associated with exposures to outdoor toxic air contaminants. The Bay Area Air Quality Management District is already developing such programs, including the Community Air Risk Evaluation (CARE) program.

The ARB notes that reductions achieved under the 2007 SIP will come primarily from on-road motor vehicle and off-road mobile sources, including light- and heavy-duty vehicles. California Air Resources Board, Functional Equivalent Document, prepared for the California Cap on GHG Emissions and Market-Based Compliance Mechanisms, October 28, 2010.
18 19

Bay Area Air Quality Management District, Bay Area 2010 Clean Air Plan, September 2010.

Figure 3. Criteria Pollutant Emissions per GHG Emissions for Select Sources (Normalized to Petroleum Refinery Combustion Emission Rate)
100

Pounds of Criteria Pollutant Emissions per Metric Ton of GHG Emissions, Normalized by Refinery Emission Rate

90

80

70

60

50

40

30

20

10

On-Road Heavy-Duty Vehicles On-Road Passanger Cars Other Manufacturing & Industrial Fuel Electricity Generation Petroleum Refining Fuel Combustion

ROG 87.20 73.80 6.40 1.40 1.00

NOx 40.08 4.71 7.49 0.86 1.00

PM2.5 9.44 1.22 3.78 1.11 1.00

Note: ROG is reactive organic compounds. Source: Schatzki, Todd and Robert N. Stavins, Addressing Environmental Justice Concerns in the Design of Californias Climate Policy, October 2009.

Conclusion
General Plan proposals aimed at adding additional GHG regulations on Richmond emission sources already covered by the AB 32 cap-and-trade program should not be pursued. These proposals would achieve no reductions in GHG emission beyond AB 32, but would raise costs to California and business in Richmond. Rejecting these proposals sends a message of support for the cap-and-trade program and avoids erecting barriers to local economic development in the City.