* Cap and trade to give away most permits at 2012 start
* Rules relaxed due to weak economy
(Adds comment by critic)
By Peter Henderson
SAN FRANCISCO, Oct 29 California unveiled on
Friday its final blueprint of a market system to curb
greenhouse gases, relaxing expected rules in the face of a weak
economy in a measure that could set the tone for the nation's
By agreeing to give away virtually all necessary permits to
factories and power plants when the program starts in 2012,
rather than sell them at auction, the U.S state with the
biggest economy and population is acknowledging the challenges
of double-digit unemployment -- and the reality that pollution
decreases as the economy slows.
California aims to cap total emissions of gases linked to
global warming and let factories and power plants trade for an
ever-decreasing number of permits to emit gases. In theory,
market forces will drive efficiency in the system, known as cap
There is still a debate about the economic merits of the
plan, which planners in the Friday draft estimate will shave
about 0.1 percentage point from annual state growth.
Many Californians see such environmental regulation as
positive for the economy by spurring "green" jobs. Voters next
Tuesday could put on hold a climate change law, including the
emissions market, but polls show the Proposition 23 challenge
to the state's climate change law is set to be rebuffed.
After the failure of federal climate legislation, the fate
of California's law and the details of its cap-and-trade plan
are seen as a U.S. turning point -- either away from addressing
climate change or toward stronger action.
"California is the biggest icebreaker there is, and if that
ship stops moving it will have a huge effect on everyone else,"
said former state climate change planner Jon Costantino, a
lawyer at Manatt, Phelps & Phillips, who said passage of the
rule, rather than its details, was the key for alternative
Many in traditional industry consider the state climate
initiative to be too ambitious, at least for now.
"The economy is still bad. We can't afford it," said Anita
Mangels of the Yes on 23 campaign to suspend the climate law.
But a group of manufacturers, farmers, petroleum companies
and others who have been critical of plans, said the new draft
better reflected the reality of the weak economy.
"It also provides a gradual approach in the early years
that will allow California businesses the time needed to meet
the 2020 goals," said Shelly Sullivan, executive director of
the AB 32 Implementation Group.
The state's 2006 law, AB 32, requires it to return to 1990
levels of greenhouse gas emissions by 2020, and the hobbled
economy has produced fewer greenhouse gas emissions than
expected, making the goal less onerous.
The state agency planning cap-and-trade has responded in
part by ignoring a suggestion by a panel of economists last
year to auction off the emissions permits.
Under the plan unveiled on Friday and likely to be adopted
Dec. 16 by the powerful Air Resources Board, the brunt of the
market force will not be brought to bear for years.
Planners say that by setting clear limits and clear rules
for the scheme, it hits a compromise that will allow polluters
flexibility to act, investors certainty, and improve the
environment without causing economic disruption.
Polluters will be given on average about 97 or 98 percent
of the permits they will require in the first year.
DIFFERENT INDUSTRIES, DIFFERENT PLANS
The state will give away 100 percent of permits through
2020 to oil drilling, cement and other industries that
otherwise might shut down if forced to pay for permits.
Sawmills, food manufacturing and others will get shorter-term
aid. Within an industry, more efficient firms will get more
allowances, which less efficient companies may need to buy.
In addition up to 8 percent of their permit needs could be
met with so-called offset credits from projects that avoid
emissions or soak up greenhouse gases - such as planting trees.
That's double a previous goal and a clear easing of rules.
The state will create as many permits as expected emissions
in the first year, and it will set aside an average of 4
percent of permits over 2012-2020 to be sold if trading prices
go too high. The reserve will be about 1 percent in 2012.
Any permits auctioned by the state will cost at least $10
per tonne in the first year, rising to $15 in 2020. There will
also be a range of ceiling prices each year, in case trade
becomes too volatile, rising in steps between $40 and $50 per
tonne in 2012 to a top range of $60 to $75 in 2020.
Transportation fuels will not be covered until the second
round of trade, starting in 2015, when roughly 85 percent of
state emissions will be governed by cap-and-trade.
California is part of an 11-member group of states and
Canadian provinces, the Western Climate Initiative, which aims
to start a joint trading scheme in 2012, beginning with a few
A similar cap-and-trade system is in place in Europe and a
limited scheme already is operating in the U.S. northeast.
(Additional reporting by Tim Gardner in Washington DC and
Sarah McBride in Los Angeles; editing by Mary Milliken and