California Climate Rules Not Made for Pandemic Times

a positive effect on the environment. For example, fewer daily commuters on the highway means less greenhouse gases coming out of tailpipes. So this would seem like a small silver lining in an otherwise horrendously awful situation. Except it's not, or at least not in the state of California. In one of the supreme ironies of the pandemic, the Golden State may actually be a victim of its own aggressive

climate change regulations. That's because one of the main ways California regulates climentimate change is through a so called cap and trade system for greenhouse gases. We'll get into this a lot in just a second, but basically what the state does is it sets a cap on the amount of greenhouse gases you can emit, and then it forces emitters to buy permits essentially that offset their overages. If

that sounds complicated, that's because it is. But the main problem is that it was designed assuming that there would always be companies that would exceed the cap, and thus there would always be overages to be traded. Well, not anymore. David R. Baker, a Bloomberg News energy reporter based in San Francisco, has been reporting on California's cap and trade system, and he says some really weird things have been happening with it the past few months. David joins us to

explain how the system works and what's going wrong. Cap and trade is one of the central programs to the way California fights climate change. It's not the only one by a long shot, but it's one of the biggest, and I think easily the most complex, and eventually it is a system that sets up a kind of market for the right to put carbon dioxide or other greenhouse gases into the atmosphere. It's very, very complicated the way the state created it, but the principle is simple enough.

For every ton of greenhouse gases that a company wants to admit, they have to buy a permit called an allowance. An allowance, OK, the number of allowances that are available in any given year matches the cap that sort of top that the ceiling that the state has set on emissions. That cap goes down bit by bit year by year,

so the state allows fewer emissions every single year. And if you're out there emitting greenhouse gases, you still have to pay for each ton that you put out there, so it'll get a little bit harder and a little bit more expensive year by year. Also, the state sets a floor price for these allowances, so that price is guaranteed to go up bit by bit as the system goes along. So you're right, it is pretty complicated, but

it actually sounds kind of clever. It's sort of an interesting way to bring in market forces to kind of regulate carbon emissions. So who are the people who are buying these allowances, the ones who are going over their caps and need to essentially pay to be able to put more carbon into the atmosphere. Yeah, the people the companies who are buying the allowances, A lot of them are ones that you would expect. So we have an oil industry here in the state, a big one with

a lot of oil refineries. So those refineries and the companies that own them, like Chevron and Tsorro are out there and every year buying up these allowances. People who operate power plants are in there buying allowances. But you also see entities in there that are purely financial. So JP Morgan is always in there buying allowances. Banks are are they What are they doing with these allowances? It's

an investment. You know that there are people out there who are going to need to buy these at some point or another. And you also know, if you're a bank, that the price of these things is going to go up bit by bit no matter what. So if you've got if you've got the ability to buy them and hold them for a bit, you know you can actually make money. That's wild. So this is almost it's like they've created a thing of value and that thing of value is going to go up, and now you have

investors who are interested in buying it. That's that's really fascinating. Yeah. So yeah, essentially, the state has created a market for carbon emissions, like there's a market for corn or soy or copper, And let's get into what's happening right now. It sounds like that market is failing or it's not doing what it's supposed to be doing. So what's going on is this? Are these allowances now worthless? Like, what's

happening with this market that the state of California created? Well, the market has been hit by the pandemic pandemic lockdown like just about everything else, because suddenly nobody was driving to work. Sales of gasoline fell off a cliff, all the factories closed, all the offices closed down, and the economy was putting out far less carbon emissions than anyone expected.

We don't know exactly how much less, but I know the oil refineries in the state were processing like a third less oil than they normally do, so it's a pretty big hit. And suddenly all these companies that needed to be in this market buying permits for their greenhouse gas emissions didn't have as many emissions that they had to cover, so they didn't have to buy as much. And you first saw a big drop in prices on

the secondary market for these allowances. And this is the market where you have the investors buying and trading there's like a three day period where it absolutely crashed, but then it started coming back up again. The main thing that we just saw this past month is these allowances get sold off by the state in quarterly auctions, and the auction that was held this past month just tanked. The amount of money that the state got out of it is just a tiny fraction what they usually do.

I think they got about six percent of the revenue that they got from the previous auction. It went from I think six hundred and thirteen million dollars in revenue to the state in February to twenty five million in May. So, yeah, it was a big hit. We're going to take a quick break for a moment, but when we come back, we're going to dig into the irony of this whole situation and talk about the impact this could have on

California's budget. Stay with us, welcome back. We are talking to Bloomberg News is David R. Baker from his home in San Francisco, California. He says, it's not just investment banks they are taking a bath here on these carbon allowances. The state itself is going to get hurt big time by the sudden shift when the governor in mid May put out his revised budget, showing just how badly he thought everything was going to get hit by the pandemic shutdown.

He was quite explicit about that. There's a section of the budget that says, we know we're going to get much less money out of the source for the rest of the year, so we're going to prioritize things. There's only a handful of the programs that we would normally fund that we're going to fund now. They windowed it down to four high priority items. Usually there's a couple a dozen of programs that this thing constantly feeds money into. What are some examples of things that aren't going to

be funded this year. I didn't see you mention of the clean vehicle rebates, so I think that may be running on fumes, as it were. And just to clarify, that's a rebate that the state gives you if you buy a let's say, an electric car. So that's money that you if you're you know that won't incentivize people to purchase, you know, electric cars and things like that, exactly.

There's a state rebate for buying an electric car. There's a state rebate for hydrogen fuel cell cars too, and that's been a pretty good incentive over the last ten years. It's one of the reasons why we're the biggest electric vehicle market in the US by a long shot. But yeah, suddenly this this source of funding is getting seriously squeezed.

This is one of the reasons why I really I love the story that you wrote on this is because it's so ironic, like you have a huge drop in the amount of greenhouse gas emissions that are going into the atmosphere, and yet that makes it somehow harder for

the state to regulate climate change. I mean, do you think that based on that this is like a fundamental flaw in the way the state has gone about this or is this just really a blip and you know, once things go back to normal, the state's plan, this cap and trade program, will you know, begin working the way it was supposed to do. I think it's I think it's too painful to call a blip, but I

do think it'll be a temporary thing. None of the people I've talked to who actually, you know, follow this market day to day are worried that it's collapsing or that it's somehow failing, and the state is extremely committed to making sure it runs. And when they set it up, they created so many rules about how the market operates that it's just maddening to wrap your brain around them. But some of those rules are actually designed for situations

like this. They have a mechanism for basically removing any allowances that don't get sold. They can pull those out of the market so that they don't flood things for years to come. So I do think as the economy reopens, you'll start to see the revenue in this system coming back up again. But yeah, it's incredibly ironic. I mean, the dropping emissions that we've had over the last couple of months is what environmental community dreams of. They would

love to see that, but instead because of why it happened. Yes, it's throwing a big monkey wrench into the tools that we usually used to lower emissions. That's it for today's episode of Parts per Billion. If you want more environmental news, check out our website newstot Bloomberg environment dot com. That website, once again is Newstop Bloomberg environment dot com. Have any thoughts about what you just heard, or really about anything else,

hit us up on Twitter. We use the handle at Environment. Today's episode of Parspabillion was produced by myself along with Josh Block and Marissa Horn. Parts per billion was created by Jessica Coombs and Rachel Dago. The music for today's episode is a message by Jazar and Surf Queen by Leydon Cordell. They were used under a Creative Comments license. Thank you for listening. Taxes and accounting are complicated, but finding a good tax podcast shouldn't be. I'm Siri Blusu

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