California, Taking Big Gamble, Tries to Curb Greenhouse Gases

NY Times
September 15, 2006

By FELICITY BARRINGER

SACRAMENTO — In the Rocky Mountain States and the fast-growing desert Southwest, more than 20 power plants, designed to burn coal that is plentiful and cheap, are on the drawing boards. Much of the power, their owners expected, would be destined for the people of California.

But such plants would also be among the country’s most potent producers of carbon dioxide, the king of gases linked to global warming. So California has just delivered a new message to these energy suppliers: If you cannot produce power with the lowest possible emissions of these greenhouse gases, we are not interested.

“When your biggest customer says, ‘I ain’t buying,’ you rethink,” said Hal Harvey, the environment program director at the William and Flora Hewlett Foundation, in Menlo Park, Calif. “When you have 38 million customers you don’t have access to, you rethink. Selling to Phoenix is nice. Las Vegas is nice. But they aren’t California.”

California’s decision to impose stringent demands on suppliers even outside its borders, broadened by the Legislature on Aug. 31 and awaiting the governor’s signature, is but one example of the state’s wide-ranging effort to remake its energy future.

The Democratic-controlled legislature and the Republican governor also agreed at that time on legislation to reduce industrial carbon dioxide emissions by 25 percent by 2020, a measure that affects not only power plants but also other large producers of carbon dioxide, including oil refineries and cement plants.

The state’s aim is to reduce emissions of climate-changing gases produced by burning coal, oil and gas. Other states, particularly New York, are moving in some of the same directions, but no state is moving as aggressively on as many fronts. No state has been at it longer. No state is putting more at risk.

Whether all this is visionary or deluded depends on one’s perspective. This is the state that in the early 1970’s jump-started the worldwide adoption of catalytic converters, the devices that neutralize most smog-forming chemicals emitted by tailpipes. This is the state whose per capita energy consumption has been almost flat for 30 years, even as per capita consumption has risen 50 percent nationally.

Taking on global warming is a tougher challenge. Though California was second in the nation only to Texas in emissions of carbon dioxide in 2001, and 12th in the world, it produced just 2.5 percent of the world’s total. At best, business leaders asked in a legislative hearing, what difference could California’s cuts make? And at what cost?

California, in fact, is making a huge bet: that it can reduce emissions without wrecking its economy, and therefore inspire other states — and countries — to follow its example on slowing climate change.

Initiatives addressing climate change are everywhere in California, pushed by legislators, by regulators, by cities, by foundations, by businesses and by investors.

Four years ago, California became the first state to seek to regulate emissions of carbon dioxide from automobile tailpipes. Car dealers and carmakers are challenging the law in federal court.

In late August, Gov. Arnold Schwarzenegger signed a measure requiring builders to offer home buyers roofs with tiles that convert sunlight into electricity. Homeowners in some communities are already choosing them to reduce their electric bills.

California, which has for decades required that refrigerators, air conditioners, water heaters and other appliances become more energy efficient, just added to the list: first, chargers for cellphones or computers; second, set-top boxes and other remote-controlled devices. Those categories consume up to 10 percent of a home’s power.

Last fall, California regulators barred major investor-owned electrical utilities from signing long-term contracts to buy energy unless the seller’s greenhouse-gas emissions meet a stringent standard.

“We are dealing with it across the board,” said Michael R. Peevey, the president of the Public Utilities Commission. By contrast, the Bush administration has been averse to any legislative assault on climate change.

Opponents say California may hurt its own residents with its clean-energy mandate. Scott Segal, a lawyer for Bracewell & Giuliani who represents electric utilities, summarized California’s policy as: “All electrons are not created equal. We’re going to discriminate against some of them, and create artificial barriers in the marketplace for electricity.” California consumers could end up paying more for their energy and struggling to find enough, Mr. Segal said.

Is California dreaming? Can its multifaceted approach become a toolkit for other states? Will investors make the state the incubator for clean-energy technologies that will reduce its energy bills and buoy its economy? Or will all this turn California into a stagnating economic island of ever-rising electricity prices and ever-rolling blackouts?

One thing is certain: The issue will not go away. This summer, a brutal California heat wave killed roughly 140 people. A 2004 National Academy of Sciences report predicted that, at the current growth rate of emissions, there would be at least five times as many heat waves in Los Angeles by 2100 compared with the current historical average, and twice as many heat-related deaths.

The study predicted that at least half the state’s alpine forests would disappear by century’s end, and that the Sierra snowpack — crucial to California’s water supply — would decline by at least 29 percent and as much as 70 percent.

There seems to be political support, in California and nationally, for action on climate change. Statewide, a July 26 poll from the Public Policy Institute of California showed that 79 percent of 2,051 people surveyed said that global warming was a “very serious” or a “somewhat serious” threat to the state’s economy and quality of life. The findings mirrored those of a national poll of 1,206 people conducted in mid-August by The New York Times and CBS News.

But polling organizations have asked little about the potentially painful sacrifices that may be required.

The Car Culture

Back in the 1950’s, when the movie director George Lucas was growing up, cars rocked around the clock in Modesto, and they were so enshrined in his 1973 hit, “American Graffiti.” The movie reaffirmed what much of the nation knew — there was no car culture like California’s. Sleek convertibles? Muscle cars? Sport utility vehicles? Many were hatched in the design studios of Detroit, but popularized by Hollywood movies and celebrities, and by plain old California consumers.

Fast forward to August. In the middle of the sales lot at Modesto Toyota sat a long row of sport utility vehicles the dealership had acquired as trade-ins in previous weeks. Leaning on a 2006 Ford Expedition, George S. Ismail, a sales manager, said, “We’re getting a lot of people trading in their sport utility vehicles for smaller cars.” Even heavily discounted, the used S.U.V.’s sit for weeks.

Yet Modesto Toyota is breaking records, Mr. Ismail said, selling about 400 vehicles a month, up from 260 a year ago. Most are small cars — Camrys and Corollas. Some are hybrid vehicles that use even less fuel, like the Prius. One-quarter of 200,000 new hybrid vehicles registered nationwide in 2005 belonged to Californians, according to the automotive analyst R. L. Polk.

With smaller cars increasingly popular, California now burns less gasoline per capita than all but six states. Burning less gasoline cuts carbon dioxide. Tailpipes account for more than half the state’s carbon dioxide emissions, federal figures show.

Much of this change in driver taste is attributable to the higher price of gasoline. But what if gasoline prices fall again and bigger, less efficient vehicles become more popular? California has an answer.

It came from Assemblywoman Fran Pavley, a Democrat and former schoolteacher who drives a Prius and whose South Coast district has a bird’s-eye view of the smoggy Los Angeles basin. Four years ago Ms. Pavley wrote the first state law regulating carbon dioxide emissions from cars and trucks. It requires vehicle makers to eventually reduce the average emissions of carbon dioxide of the mix of cars it sells in California by 30 percent, beginning with the 2009 model year. Light trucks, including sport utility vehicles, must meet the same standard by the 2016 model year.

Ten states, including New York, New Jersey and Connecticut, have followed suit. Canada instituted voluntary emissions reductions at similar levels, which major automobile manufacturers have agreed they can meet. “We think that, coupled with Canada, we’re now over one-third of the market,” Ms. Pavley said in an interview.

But automobile manufacturers and some dealerships have vowed to wipe her law from the books. Their lawsuit’s central assertion is that, by regulating carbon dioxide emissions, California is using a backdoor means to control fuel efficiency, which, under the federal Energy Policy and Conservation Act, is the exclusive preserve of the federal Transportation Department. To produce less carbon dioxide, cars would have to be more fuel efficient.

On Sept. 15, Judge Anthony W. Ishii of Federal District Court in Fresno will hear arguments on California’s request to dismiss the case. If the lawsuit survives, the first hearing is set for January. This schedule overlaps with that of another case with direct bearing on this issue. The Supreme Court, petitioned by a dozen states, led by Massachusetts, and three cities, including New York, will decide whether the law requires the Environmental Protection Agency to declare carbon dioxide a pollutant and to regulate it. The Bush administration contends it has no authority to do either.

If the Supreme Court accepts the administration’s arguments, it will not help California in its legal fight against Detroit, because a key to the state’s case is the contention that carbon dioxide is in fact a pollutant under the Clean Air Act.

Hungry Electronics

Imagine all the small electronic devices in a modern home — iPods and handheld organizers, cellphones and laptops — charging at a power strip.

Arthur H. Rosenfeld, a member of the California Energy Commission, knows how much electricity is wasted when people unplug the devices but leave the charger plugged in. Dr. Rosenfeld estimates that such chargers — along with appliances like televisions that draw power even when they are off because they are designed to respond to remote controls — use up to 10 percent of an average home’s power.

He calls them “vampires” — things with teeth that suck power at night.

Recently, Dr. Rosenfeld proudly held up a small green cellular phone charger that consumes less than half a watt of electricity — a fifth as much as its predecessors — when left plugged into an outlet. It meets state standards that take effect in 2007. The same standards will require sharp power cutbacks from audio and video equipment, both when the devices are in use and when they are standing by for a remote signal.

Since the 1970’s, California’s energy-efficiency standards have reduced electricity consumption by the equivalent of the output of more than 20 average power plants, Dr. Rosenfeld said. And the standards have become templates for other states and Washington. Nationally, Dr. Rosenfeld added, energy-efficiency policies have saved the economy $700 billion since the 1970’s.

But why would utilities, which sell electricity, have any interest in seeing sales diminish? In 1982, the Public Utilities Commission decoupled utilities’ sales and their profits by allowing rate increases for utilities that helped customers cut energy use.

The logic was that for every dollar the consumer did not spend on energy, the utility would get real income — say 15 cents, which would exceed the profit the utility could have made on that dollar. For consumers, efficiency savings more than offset the rate increases. “Even though rates go up, bills go down,” said Mr. Harvey of the Hewlett Foundation.

Ralph Cavanagh, the co-director of the energy program at the Natural Resources Defense Counsel, said: “Every other state in the country rewards utilities for selling more energy. It’s a perfectly perverse incentive.”

Mr. Peevey, of the utilities commission, said he expected new efficiencies to absorb half the increase in demand as the state grows to 40 million people, from 38 million.

Mr. Peevey’s commission has also been a prime mover in increasing state support for residential solar power. Solar energy remains four times as expensive as electricity produced by conventional fuels. But, he said, “the idea is to make the solar industry a self-sustaining, economically viable industry,” and to make the cost come down.

California businesses and investors, public and private, are getting into the act. The state’s huge pension fund, Calpers, is committing just under $1 billion to renewable-energy investments. Among the early incentive-driven ventures in solar power are the homes in the Carsten Crossings subdivision in Rocklin, a Sacramento suburb. In August, Mr. Schwarzenegger signed legislation making solar panels a standard option for new-home buyers by 2012 and ensuring that utilities reduce homeowners’ bills based on the electricity returned to the grid.

Some of those incentives were available when construction started. Now four families have moved in. They see themselves as pragmatists, not crusaders. “This is the next logical step” in construction, said one of the homeowners, Lt. Col. Thomas Sebens, a specialist in drone aircraft at Beale Air Force Base.

Their roofs show how public and private decisions, markets and government, have meshed. T. J. Rodgers, a fiercely anti-regulatory entrepreneur, underwrote the solar cells’ production. The PowerLight Corporation, based near San Francisco, bought the cells from Mr. Rodgers’s company, the SunPower Corporation, and turned them into roof tiles. The tiles ended up on houses built by Grupe Homes, based in Stockton, because state utility regulators established a $5,500 state-financed rebate for builders who install similar systems, which cost $20,000. Federal law gives home buyers a $2,000 tax credit; state law guarantees lower electric bills as utilities buy back power homeowners do not need.

The July utility bills, the new homeowners’ first, were the talk of the neighborhood.

Larry Brittain, an office products salesman with a four-bedroom, 2,400-square-foot home, was the winner at $73.27 for electricity in the month ending July 25 — the hottest July on record. For the last 10 June days in a similar house nearby, his bill was $103.

“This is a bet with a winning hand,” Mr. Brittain said. “You can’t lose.”

Pressure on Suppliers

In Gerlach, Nev., 100 miles north of Reno, a high desert butte was made ready two years ago for its wedding to the Granite Fox Power Project, a plant designed to burn pulverized Western coal. Electrical transmission lines were close by.

But, like Miss Havisham in Dickens’s “Great Expectations,” Gerlach waits for a groom that may never arrive. The plant was a certain source of significant new carbon dioxide emissions. Mr. Cavanagh predicted that it “would wipe out all the carbon dioxide savings from California’s spectacularly successful efforts to save electricity during 2001 and 2002.”

Southern Californians would likely be the eventual customers. But last fall, the California Public Utilities Commission barred the investor-owned utilities it regulates from signing long-term contracts for electricity if the emissions exceeded those of the cleanest gas-driven plants. The only technology that could accomplish that with coal is expensive and has not been perfected.

Said Mr. Peevey of the commission, “All we’re saying is, Fine, you send it here, but it has to be, in terms of air quality and greenhouse gas emissions, it has to be comparable to the newest combined-cycle gas turbine.” One fifth of California’s electricity comes from coal, the vast majority of it from outside the state.

This past winter, Sempra Energy, the parent of San Diego Gas & Electric and Sempra Generation and the developer of Granite Fox, put the project up for sale. Neal E. Schmale, Sempra’s president, said the ruling had had a negligible impact on the decision. High natural gas prices prompted the company to invest in gas storage and terminals instead, Mr. Schmale said.

Among California environmentalists, however, the “for sale” sign on Granite Fox was taken as a victory for a pioneering policy that reaches beyond the state’s borders. V. John White, an environmental lobbyist in Sacramento, compares building a Southwestern power plant to building a mall: California is a desirable anchor tenant.

But California is also the state where electricity deregulation foundered in 2000; bills soared and an economic crisis ensued. Even without a crisis, Californians’ electricity rates are about 40 percent above the national average.

Robert McIlvaine, a coal industry consultant from Northfield, Ill., said, “If you are going to generate electricity from gas, the cost of doing so is going to be considerably greater than coal — 50 percent more or 100 percent more.”

But, Mr. Harvey said: “People don’t pay rates. They pay bills. You can have twice the rate and half the consumption and be just as happy.”

On Aug. 31, legislators enacted the bill sponsored by the State Senate president, Don Perata, Democrat of Oakland, and extended the commission’s rule to all power providers.

Business people ask if this could provoke another crisis. Power-plant siting experts, like Thomas A. Johns, the vice president of development at Sithe Global Power, a New York company, say that, in the short term, the loss of California business may not matter much to the merchants of power in the Southwest. Fast-growing cities like Phoenix and Las Vegas are ready markets.

In the long run, however, “California is a big piece” of the total consumption in the West — 40 percent, Mr. Johns said. “If 40 percent of the Western load will not buy coal, you will have less coal.”

The risk, both Mr. Johns and Mr. Schmale said, is in increasing the state’s reliance on natural gas, whose price has been extremely volatile in recent years. (California law bars construction of nuclear plants until the questions of waste disposal are resolved.)

“When you exclude coal and nuclear from your base load,” Mr. Johns said, “you’ve only got one option, and that’s natural gas.” Another measure awaiting the governor’s signature toughens standards by requiring that by 2010, 20 percent of the energy sold in California comes from a portfolio of renewable sources, like geothermal and wind. Last year, 10.7 percent of California’s power came from renewable sources.

New renewable energy sources could make prices less volatile, but Mr. Schmale of Sempra said California’s policy makers need to muster “the political will” to build transmission lines and “all those other things that would be necessary to make the environmental things work.”

Caps, Costs and Credits

Perhaps the most ambitious measure California has undertaken is the newly mandated 25 percent reduction in carbon dioxide emissions. “If we do it right,” Mr. Schwarzenegger said at a news conference, “it can be an example for the rest of the world and the rest of the country to see.” If not, the concept could be discredited.

The law, sponsored by Ms. Pavley and the Assembly speaker, Fabian Núñez, Democrat of Los Angeles, gives the California Air Resources Board authority to set industry-specific targets for emissions reductions, effective in 2012, and to establish mechanisms — including the creation of emissions allowances that companies might trade or bank — to facilitate compliance. These targets would be adjusted from 2012 to 2020 to meet the 25 percent goal.

Those who have studied the question agree that the new system will cost consumers more. “A cap-and-trade system will raise the cost of electricity to consumers to some degree,” said Lawrence H. Goulder, a professor of environmental and resource economics at Stanford University.

As the European Union found after the 1997 Kyoto Protocol, figuring out how to assign emissions credits is not easy.

Whatever the decisions, chances are that they will be met by a lawsuit. Margo Thorning, the chief economist at the American Council for Capital Formation, a group supporting business interests, argues in a study that “sharp cutbacks in California’s energy use would be necessary to close the 41 percent gap in 2020 between projected emissions” and the cuts the law requires. Dr. Thorning added in an interview, “The technologies that will enable us to move quickly in a cost-effective way away from fossil fuel just aren’t there yet.”

Allan Zaremberg, president of the state Chamber of Commerce, predicted that businesses would flee to unregulated areas and continue to emit climate-changing gases.

Dr. Thorning’s study was countered in mid-August with a study by David Roland-Holst, an adjunct professor of agricultural and resource economics at the University of California, Berkeley. Professor Roland-Holst argued that the new law would add $60 billion and 17,000 jobs — in fields like alternative energy — to the California economy by 2020 by attracting new investment.

James D. Marston, the head of state global warming programs for Environmental Defense, the New York group that helped lead the fight for California’s new carbon cap, said, “We’ll look back in 10 years and say this was the final breakthrough and the final political consensus that we have to do something meaningful on global warming.”