Timing
Several parties, including Environmental Council, NRDC/UCS, and SCE, urge California to move forward with a cap-and-trade program for natural gas without waiting for such a program to be adopted at the regional or the national level. NRDC/UCS argue that deferral of a cap-and-trade program would leave California in a position of having to accept other jurisdictions' program designs, which might ultimately disadvantage the state. They point out that California has the opportunity to design and develop a system that would help serve as a model for broader systems and help serve California's interests. Environmental Council asserts that there is no guarantee that any regional or federal system will be in operation even a decade from now, and California should act now because emission reductions are needed over the next ten years to avoid the worst impacts of climate change.
Other parties, including PG&E, Kern, CMTA, El Paso, and Mojave, argue that a California program would be more efficient if deferred until such time that it can be integrated into a regional or national system. CMTA asserts that a robust cap-and-trade system is best achieved through a regional or national system. PG&E, El Paso, and Mojave believe that deferral of a cap-and-trade program would facilitate integration into a broader program and reduce the need to revisit California's program once a broader program is in place. As an additional benefit of deferring a California cap-and-trade program, Kern argues that new technologies that become available later might reduce the cost of the program. Kern believes that such a program should be deferred until these technologies are available at a reasonable cost.
Comparable to the electricity sector, there essentially are four options for how to regulate GHG emissions in the natural gas sector: 1) a carbon tax, 2) upstream regulation of emissions from fossil fuel combustion, 3) a downstream emissions cap (with or without trading), and 4) additional direct mandatory/regulatory requirements.
As we discuss in Section 3.2.2 for electricity, we did not seriously consider the carbon tax option in this proceeding. Similarly, we have not undertaken a detailed review of upstream regulation of fossil fuel consumption in California. We have instead focused on options for additional direct mandatory/regulatory requirements and a cap or cap-and-trade program that includes the natural gas sector.
As for electricity, we assess first the direct mandatory/regulatory policies and requirements that California already has in place that contribute to GHG reductions. Since the natural gas sector has limited ability to substitute different fuel types for natural gas, there is really only one major direct programmatic approach to reducing emissions from the sector currently in effect. That primary tool is energy efficiency, including both building codes and appliance standards, as well as energy efficiency programs currently administered by the Public Utilities Commission. The Legislature recently adopted a program to provide financial incentives to residential and commercial customers to use solar hot water heaters in new construction and to replace existing hot water heaters. Like energy efficiency, this program will lower natural gas usage and GHG emissions.
As we describe in Section 3.2.2, the Energy Commission updates its energy efficiency building codes and appliance standards approximately every three years, and includes other requirements on an on-going basis. The Public Utilities Commission sets requirements for the amount of energy savings that each natural gas IOU is required to achieve on an annual basis, just as it does for the electricity IOUs, based on the availability of cost-effective energy savings in the utilities' territories. The risk/reward mechanism adopted in D.07-09-043 applies to both natural gas and electricity utilities. Although these programs are primarily directed at end users, opportunities exist for GHG emission reductions in natural gas infrastructure, including storage. It may be cost effective to mandate improvements that enhance operational efficiencies and decrease fugitive emissions. As we refine programmatic measures in the natural gas sector, either as modifications to existing programs or as recommendations to ARB, we intend to examine emission reduction measures for natural gas infrastructure.
AB 2021 requires that the Energy Commission set statewide energy efficiency targets for 2017, and the Energy Commission's determination that the goal for the State should be to achieve all cost-effective energy efficiency apply for both natural gas and electricity utilities in the state.
Consistent with our discussion in Section 3.2.2, we believe that the goals of AB 32 would be best achieved if all entities that provide transportation, distribution, and/or retail sales of natural gas to end users, including IOUs, POUs, and interstate pipelines, are subject to minimum requirements in the areas of cost-effective energy efficiency or other demand reduction programs. We expect to consider other programmatic options for reducing demand for natural gas including the use of solar hot water heating equipment. Such requirements would benefit California customers by ensuring that they receive the GHG emission reductions of cost-effective energy efficiency and solar water heating. Therefore, our recommendation that ARB adopt mandatory minimum levels of cost-effective energy efficiency savings applies to both natural gas and electricity for IOUs and POUs. We reiterate our suggestion that, if ARB believes that it lacks authority to implement this suggestion, it seek such authority as soon as possible from the Legislature. Also as described in Section 3.2.2, we reject the suggestion made by some parties that we should eliminate mandatory targets for energy efficiency and allow an AB 32 cap to govern instead.
We see little advantage of implementing a cap system in the natural gas sector, compared to reliance on the direct programmatic approaches described above. Under either a cap or direct programmatic approach, ARB will need to measure the GHG emissions from the sector as part of its obligations under AB 32 of ensuring that statewide GHG emissions are reduced to 1990 levels by 2020. If the anticipated level of reductions from programmatic approaches is not achieved in the natural gas sector, ARB will likely modify and/or add new programmatic approaches. Therefore, any advantage of a cap only would be achieved under the programmatic approach we recommend. In addition, similar to the electricity sector, a cap without a trading component would offer fewer advantages than a cap-and-trade program. Therefore, we do not recommend a cap-only system for the natural gas sector in California.
As summarized in Section 4.4.1 above, parties disagree regarding whether the natural gas sector should be included in a multi-sector cap-and-trade system. Some parties, including PG&E, SDG&E/SoCalGas, and Southwest Gas, prefer that California rely only on programmatic measures to achieve GHG reductions in the natural gas sector. Other parties, including NRDC/UCS, Environmental Council, and SCE, advocate including the natural gas sector in a multi-sector cap-and-trade system.
In Section 3.2.2, we recommend that ARB design a multi-sector cap-and-trade system that includes the electricity sector. However, we recommend that the natural gas sector not be included in a cap-and-trade system at this time. There are several reasons for this recommendation. Key differences between the electricity and natural gas sectors persuade us that it would be premature to include the natural gas sector in a cap-and-trade system. First and foremost, there are significantly fewer options at this time to reduce GHG emissions in the natural gas sector. Unlike the electricity sector, there is no commercially available low-carbon alternative source of natural gas. While bio-gas holds potential, its development is still in the early stages. Thus, in the near-term, natural gas utilities and end-users cannot substantially reduce GHG emissions by choosing an alternative source of natural gas. As a result, energy efficiency and solar water heating programs are the only reliable near-term options available for reducing GHG emissions in the natural gas sector.
Second, because energy efficiency and solar water heating programs are the primary means to reduce GHG emissions in the sector, the incremental benefits from including the natural gas sector in a multi-sector cap-and-trade program are likely to be smaller than those for the electricity sector. Third, unlike the electricity sector, reporting protocols for GHG emissions associated with the transportation, storage, and delivery of natural gas are still under development and do not yet include provisions for reporting end user-related combustion emissions. Relying on programmatic measures to achieve emission reductions would allow additional time to develop protocols for all sources of GHG emissions in the natural gas sector. Finally, we agree with DRA that including the natural gas sector in a cap-and-trade system now could expose small end users in the natural gas sector to greater price risk than small end users in the electricity sector because their utilities have fewer options to mitigate variations in allowance prices.
As mentioned in our discussion of electricity sector cap-and-trade options, we are aware that there is consideration, at both the regional and national levels, of upstream regulation for natural gas use. Should such a system be put in place, the programmatic approach we endorse today would still be compatible with an upstream system with minimal adjustments necessary.
While we recommend that the natural gas sector not now be included in a multi-sector GHG emissions cap-and-trade system at this time, we do not reject GPI's and NRDC/UCS's argument that eventual inclusion of all fossil fuels in a multi-sector cap-and-trade system could maximize its benefits. Taking a programmatic approach for the natural gas sector now would not preclude its future inclusion in a multi-sector GHG emissions cap-and-trade system. As California gains greater experience with a cap-and-trade system, regional and national frameworks are established, reporting protocols are adopted, and alternative lower-carbon sources of natural gas are developed, we expect that it will become appropriate to add the natural gas sector to the multi-sector GHG emissions allowance cap-and-trade system, and we expect to recommend inclusion of the natural gas end-use sector at that time.
4.4. Distribution of Allowances in a Cap-and-Trade System
El Paso/Mojave, IP, Lodi, SDG&E/SoCalGas, SMUD, and Southwest Gas filed comments that address the distribution of allowances in the natural gas sector if it is included in a GHG emissions cap-and-trade system. However, we need not address this issue since we recommend a programmatic approach that relies on direct emission reduction measures. In this approach, no distribution of allowances would be necessary.
