Related Story: A sampling of greenhouse gas emissions from California companies

A major piece of former Gov. Arnold Schwarzenegger's plan to reduce greenhouse gas emissions will kick into gear Wednesday when regulated businesses throughout the state will be required to cut their pollution, or pay the price.

Under the state's new cap and trade program - the first of its kind in the nation - at 10 a.m. Wednesday, businesses such as refineries and industrial facilities will for the first time either bid on carbon credits to allow them to pollute more, or sell credits for having polluted less, under the California Air Resources Board (CARB) first pollution allowance auction.

Cap and trade
Los Angeles Department of Water & Power-Haynes Generating Station in Long Beach. (Sean Hiller/Staff Photographer)

The idea is simple: The state sets a limit - a "cap" - on the amount of greenhouse gases each business or utility is allowed to emit. Companies that exceed their limits must buy additional allowances in the system. Companies that reduce their emissions below their cap can sell or "trade" their unused allowances.

"For the first time, business will begin to understand what it means to put a price on carbon," said Stanley Young, a spokesman for the California Air Resources Board. "The program rewards efficiency. It will help move California away from its dependence on fossil fuels and toward a clean-energy economy."

"It's the largest carbon market in the United States," Young added.

The program is a major component of AB32, the law signed by Schwarzenegger in 2006 that required California to lower its greenhouse gas emissions by 2020 to 1990 levels - the equivalent of a 17 percent reduction.

AB32 includes many provisions - from increasing renewable energy production in the state to requiring decreased emissions from cars. But among the most controversial is the cap and trade program, which requires companies that emit more than 25,000 metric tons of CO2 equivalent to address those emissions in one of several ways.

For each metric ton of emissions, companies must have one allowance. To begin, the companies have been given 90 percent of their allowances. They must make up the remaining 10 percent by the end of the year by either buying additional allowances on the open market, buying them at Wednesday's auction or by installing more efficient technology to reduce pollution.

For example: If an oil refinery that emits 100,000 tons of carbon has been given credits for 90,000 tons, it either has to go on the market and buy credits for the extra 10,000 tons or lower the emissions. If it reduces its emissions, say to 80,000, then it could sell the unused allowances to someone else.

Cap and Trade graphic environmental law
(Click to enlarge)

Each year, CARB issues a set number of allowances, but that number will be reduced each year by 2 to 3 percent, so by 2020, emissions will be reduced to 1990 levels.

The program targets major sources of greenhouse gas emissions, including refineries, power plants and major factories. After 2015, the law also will include transportation fuels, meaning that oil refineries will need permits to account for the emissions from all the vehicles in the state.

Wednesday's auction will be conducted using an Internet-based auction platform that allows bidders to submit their bids electronically and in secret. More than 23.1 million allowances for 2013 will be up for grabs at Wednesday's auction, as well as 39.5 million advanced auction allowances for 2015.

Money from the state auctions, which is expected to total more than $1 billion a year, must fund climate-related programs, such as making public buildings more energy efficient, providing rebates for efficient appliances or vehicles, or funding public transit projects such as high-speed rail.

Environmentalists are hailing the auction as the moment America finally got serious about addressing global warming.

"People from around the country are watching it closely," said Alex Jackson, an attorney with the Natural Resources Defense Council, an environmental group in San Francisco. 

Some business groups, however, particularly those representing oil companies, power plants and large factories that burn vast amounts of fossil fuels, call the process a hidden tax that will result in higher utility bills and gasoline prices.

"It's going to really hurt consumers. It is going to hurt small business," said Dorothy Rothrock, vice president of the California Manufacturers and Technology Association, in Sacramento.

The association asked Gov. Jerry Brown to delay the auction, but his office has declined.

The California Chamber of Commerce on Tuesday filed a lawsuit seeking to stop Wednesday's auction, arguing that CARB went beyond the authority granted under AB32.

According to the complaint, AB32 does not allow CARB to generate revenues from the cap and trade program by allocating itself emissions allowances and profiting by selling them to emitters.

"Under a legitimate `cap-and-trade' system, the cap reduces the amount of carbon emitted, while the trading mechanism allows for the most cost-effective technology to be used," chamber president and CEO Allan Zaremberg said in a recent statement. "The auction is nothing more than a revenue-generating component so its supporters can finance their pet projects."

Zaremberg figures the auction will add $20 billion to $40 billion in new taxes on electricity and gasoline over the next eight years.

Still, the program attempts to address concerns of growing energy costs.

While most companies will initially be provided 90 percent of their allowances, utilities across the state will get all of their allowances for free, CARB spokesman David Clegern said.

However, that doesn't mean they don't have to reduce their emissions. Rather than having the allowances count towards their emissions, they must sell them, explained Clegern.

"So they can return that value to their ratepayers. It's a buffer to prevent large price increases," he said.

CARB estimates the regulation will add 10 cents per gallon to the price of gas for every $10 per ton that industry pays for allowances. The futures market has lately been pegging the price at around $12 a ton, which could result in a 12-cent per gallon increase.

Each utility's compliance obligation is based on how much power they generate using fossil fuels, which includes coal and natural gas, Clegern said.

Gary Stern, director of market strategy and resource planning for Southern California Edison, said 15 percent of the allowances utilities sell off are earmarked for programs to expand the state's effort to reduce greenhouse gas emissions, such as incentives to buy solar systems.

"The California Public Utilities Commission will be determining that," he said. "There is a proceeding before them that will fill out the details about where those revenues will go."

The other 85 percent will go back to utility customers in the form of rebates, he said.

"It could be a bill credit, a rebate check ... those details are at the discretion of the California Public Utilities Commission."

Stern said rebates could be used to offset rate increases that might otherwise occur as a result of greenhouse gas-related obligations placed on utility companies.

"Edison feels that an offset to the rates is the best way to go," he said. "It would be the least impactful to customers, and it's the preferred way to give the money back."

Among the biggest greenhouse gas emitters in the state are Shell Oil Products US, a petroleum refinery in Martinez, the ExxonMobil refinery in Torrance and the Los Angeles Department of Water & Power-Haynes Generating Station in Long Beach.

One affected emitter, CalPortland, which manufactures cement and is headquartered in Glendora, may not participate in Wednesday's auction, according to Steve Regis, a representative with the company. He will instead have to choose one of the other two options to comply.

"Sixty percent of our emissions come from the chemical process of making cement, so there's no way to reduce that," he said. "The other 40 percent comes from fuel emissions, but bio-fuels don't burn as well."

While no one believes California's cap-and-trade program alone will remedy climate change, the system is designed to show it can be done in the world's ninth-largest economy and provide a blueprint for other governments, according to CARB.

Officials believe the re-election of President Barack Obama, who in his acceptance speech voiced support for battling climate change, will embolden states to follow California's lead.

"With the election, we expect states that had dropped their own climate efforts to take a new look at what they can do, and some of these ideas will be adapted or adopted elsewhere," Mary Nichols, CARB's chairman, said.

Innovative or destructive? Staff writer Steve Scauzillo, the San Jose Mercury News and the Associated Press contributed to this report.

kevin.smith@sgvn.com; progers@mercurynews.com

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