(Photo: Lance Page / Truthout)In this final story of the three-part series, “Colonialism and the Green Economy,” the Marottas examine how California’s cap-and-trade program perpetuates environmental injustice and public health hazards.

Read Part 1, “Colonialism and the Green Economy: The Hidden Side of Carbon Offsets” here.

Read Part 2, “Colonialism and the Green Economy in Chiapas: The Hidden Side of the Biofuel Industry” here.

California’s Cap-and-Trade Program

California’s cap-and-trade program to reduce state-wide greenhouse gas emissions went into effect on the first of this year, with the goal to reduce emissions to 1990 levels by 2020. That would be a 25 percent decrease from today.

Basically, the program intends to achieve that goal by setting a “cap” on the amount of pollution all the entities covered under the program are collectively allowed to emit every year, with that limit decreasing over time.

Covered entities either buy pollution allowances at an auction or receive them free from the state, based on historical emissions data. One pollution allowance is equal to one ton of CO2e (carbon dioxide equivalent). At the end of every year, each entity will be required to hand in a specific quantity of allowances to fulfill their climate obligation.

If an entity pollutes more than their holding of allowances permits them to, they have to make up the difference. One way this can be done is by buying carbon offset credits. California allows entities covered under the cap-and-trade program to source 8 percent of their climate obligation from carbon offset projects. For example, by preserving a forest or destroying ozone-depleting substances so they are not released into the atmosphere, carbon credits are generated. Currently, California approves only offset projects within the United States.

However, they are monitoring the credit-generating activities of Chiapas, Mexico for possible future carbon credits. Currently, these Chiapan projects are having disastrous effects on indigenous populations as Mexico develops a new economic frontier as a supplier of carbon credits for the Global North. (Learn more about these projects here and here.)

The other way to make up the difference is to buy more pollution allowances through an auction, the first of which occurred in November 2012. Four are to occur each year going forward. Although the vast majority of pollution allowances have been given out for free, more than 23 million were put up for auction in November. All of them sold, at an average of $10.09 per allowance. That’s just nine cents above the minimum bid allowed. If you think that is too low a price for polluting the planet, fear not – analysts believe the price will go up once financial firms actively take a part in the market.

Placing a price on carbon is the fundamental goal of the program. Although the true price is heavily subsidized and thus not reflective of carbon’s actual cost, it is believed that injecting a price for polluting into business-as-usual practices will create the necessary incentive for a culture based on fossil fuels to clean up its act. California’s companies, industries and institutions will be rewarded by lessening their dependence on oil – the more they reduce their carbon footprint, the more allowances they’ll be able to trade on the market (hence “trade” in cap-and-trade).

But how will California’s cap-and-trade program benefit communities like the Wilmington/Carson area of Los Angeles? Wilmington is a residential area where 85 percent of the people identify as Hispanic and 27 percent live under the national poverty line, as of the 2000 Census. Carson is an adjacent city.

The area is home to five oil refineries processing about a third of the state’s crude oil and an oil-drilling operation extracting from the third largest oil field in the United States. The Ports of Los Angeles and Long Beach – collectively the largest shipping hub in the world – are in their backyard, and thousands of diesel trucks going to and from the ports drive through the neighborhood on a daily basis in what’s been dubbed the Diesel Death Zone.

To find out how the cap-and-trade program will affect the Wilmington/Carson area, one must first ask how the industries in the neighborhood will be affected, and why. Let’s take a look at the oil refineries, since they have a number of associated “co-pollutants,” like benzene, nitrous oxide and fine dust that burrows deep into people’s lungs. These co-pollutants are not covered under the cap-and-trade program because they’re not a greenhouse gas. Although these pollutants do not contribute to global warming, they severely impact the public health of neighborhoods in the area of a refinery.

Allowance Allocation to Refineries

The justification will be explained later in this article, but what is important to know now is that refineries are given 90 percent of their pollution allowances for free in the first phase of the program. The actual amount is calculated by first finding the emissions intensity of the sector, or the average amount of emissions per barrel of petroleum product produced, and then decreasing that number to 90 percent. That number is then multiplied by the total production output for the sector, based on historical emissions data, before factoring in “assistance” and “cap adjustments.” This sector-wide allocation is then distributed to each refinery based upon its individual emissions intensity. The most efficient refinery will receive 100 percent of its needed allowances, with allocations to other refineries decreasing relative to their (in)efficiency.

Comparing California refineries to their in-state peers in this way clearly rewards the most energy efficient. However, this approach can only be described as comparing the worst to the worst. California refineries emit more CO2-per-unit-barrel of oil refined than any other refining region in the United States – from 19 percent to 33 percent more. They are the least efficient in the country, and so rewarding the most efficient refineries in California is like rewarding the least efficient on the East Coast.

As of the publication of this report, Stephen Young, the communications director of the California Air Resources Board (CARB) – the governmental body in charge of the program – has declined to comment on the efficacy of comparing California refineries to each other in an effort to promote energy efficiency in the sector.

California’s refineries are the most inefficient because they import significantly cheaper crude oils of poor quality and bitumen. Bitumen is what is present in Canada’s tar sands. This poor quality “feedstock” must then be processed to meet the state’s stringent guidelines for transportation fuels. All this equates to more energy being needed to produce petroleum products like gasoline and jet fuel.

There has been a trend in the sector of importing feedstock of increasingly poor quality. Also, the state expects international imports of crude oil to rise dramatically, with 75 percent being imported by 2020. The state foresees increasing imports coming from Canada’s tar sands. According to Chevron’s web site, it takes two tons of the sand to make one barrel of usable crude oil.

If 70 percent of California’s crude comes from low quality sources – a foreseeable future scenario – the state’s yearly emissions from the refining sector would increase by 44 percent per year when compared to the pollution levels of 2009. But, if all the crude oil being refined is replaced with crude of equal quality to that refined on the East Coast, the state would reduce its emissions by 8 million tons of CO2e per year – a reduction of 20 percent.

California’s cap-and-trade program does not place any requirements on the quality of crude being refined, nor is there a program in place to retrofit its refineries to be more efficient. California leaves that up to the market.

Refineries: An “Energy-Intensive, Trade-Exposed” Sector?

Refineries will be given 90 percent of the allowances they need for free for two reasons. The first is because the refinery sector is considered to be “energy-intensive, trade-exposed.”

Refineries use lots of energy to produce their products, and are thus acutely sensitive to a price on carbon emissions. This in turn would make California refineries trade-exposed, placing them at a competitive disadvantage to refineries outside the state. If the price of production for the state’s refinery sector increases too much, there would be a resulting increase of imports of finished petroleum products from outside the state by refiners not regulated by a cap-and-trade program. This is called carbon leakage and if it occurs, it negates the whole point of the program, which is to regulate carbon emissions.

But the question to ask is whether California’s refinery sector is truly “trade-exposed.” Currently, nearly 100 percent of the gasoline consumed in California is refined in-state, because the state’s special fuel configuration needs specific technology to produce. The number of refineries outside the state that can produce gasoline to California’s specifications is very limited. In addition, in 2011, the West Coast region – Arkansas, Arizona, California, Hawaii, Nevada, Oregon and Washington State – imported .18 percent of its finished gasoline products from international sources. It is hard to imagine, with these facts, that California’s refinery sector is trade-exposed. And, if it is not, then the rationale behind giving the industry most of its needed allowances for free is no longer valid.

But, assuming the industry is trade-exposed, the amount to which it is would be minimal; the out-of-state sources able to meet California’s fuel specifications couldn’t meet the state’s demands. The Economic and Allocation Advisory Committee (EAAC), which was established to give recommendations to California on how to distribute pollution allowances, suggested other options for reducing carbon leakage. For energy-intensive, trade-exposed industries, they advised levying a tax on imports from facilities outside California (as is done for the electricity industry). The EAAC advised handing out free allowances only when the taxing of imports is not feasible, and then, only enough of them to make up for the price differential between in-state and out-of-state facilities.

For the refinery sector, levying a tax would be relatively easy, considering the limited outside sources capable of meeting California’s specifications. If free allocation was to be used, the EAAC asserts, it would only need to cover a fraction of a refinery’s emissions to make up the price differential. So why is it that the industry receives 90 percent its allowances for free? It is possible that the state’s decision is a giveaway to an industry that not only has global repercussions, in the form of contributing to global warming, but local ones as well, in the form of hazardous co-pollutants?

Refineries and Cost Pass-Through Ability

The second reason the refinery sector was given almost all their needed pollution allowances for free is because it is an industry with 100 percent cost pass-through ability. What this means is that they have the ability to pass 100 percent of the added monetary burden of the program onto the consumer. In order to protect the consumer from an unmanageable increase in the price of petroleum products, the state has freely given out allowances to refineries.

However, the California Air Resources Board acknowledges that giving allowances away for free does not prevent cost pass-through. This is because the allowances themselves have a monetary value. If the BP refinery in Carson, for example, uses all the allowances it was given to fulfill its compliance obligation under the program, it is hit with a theoretical economic loss. Specifically, the BP refinery loses out on being able to sell those freely given allowances on the market for a profit. This is called opportunity cost, and there is no surefire way to prevent industries from passing it onto the consumer.

In the first phase of the European Union’s cap-and-trade scheme, from 2005 to 2007, European industries made enormous profits by passing opportunity costs onto consumers. For example, a study analyzing the wholesale electricity markets of Germany and the Netherlands found that opportunity cost past-through rates varied between 60 percent and 100 percent. European electricity facilities made billions of US dollars in profits by passing the “cost” of the cap-and-trade program onto consumers, even though the sector received all the pollution allowances they needed for free.

The California program is supposedly designed to de-incentivize passing opportunity costs onto consumers. By distributing pollution allowances for free based on production output, the theory goes, industries will not be willing to increase their prices. As Stanley Young, the communications director of the CARB, stated it in an email, “If you raise costs, demand will drop, your output drops, and your allocation will accordingly decrease.” The program, he went on, is designed to incentivize maintaining – or increasing – production output, so that free allocation is “maximized.”

Truthout interviewed Dr. James K. Boyce, an economics professor at the University of Massachusetts, Amherst. He is an expert in environmental economics and was part of the EAAC advising California on how to distribute pollution allowances for its cap-and-trade program. He stated that basing free allocation on production output would only minimally limit entities covered under the cap-and-trade program from passing on opportunity costs to the consumer. He stated, “It won’t be 100 percent pass-through, but it will be substantial, more than 50 percent.”

Refineries and Emissions Reductions

Most importantly, giving away 90 percent of the needed allocations to any industry dulls the incentive for that industry to reduce emissions. The only way a refinery would spend the money on energy efficiency is if the resulting reductions in emissions saves them enough pollution allowances to sell at auction – and even then, only if the amount they make at auction is more than how much they would have spent making their facility more energy efficient. Instead, it may be cheaper for a refinery to pay for the additional pollution allowances and/or carbon offsets it needs to meet its climate obligation and, thus, there could theoretically be no reductions from the industry under the program.

To make matters worse, the CARB’s economic projections show that when free allocation is combined with maximum offset credit use (up to 8 percent of an entity’s climate obligation, as explained before), seven of the state’s 15 covered refineries will then have a surplus of allowances to sell on the market. This is assumed to occur because buying offset credits will be cheaper than buying pollution allowances. Since both equal one ton of CO2e, they can use the offset credits to fulfill their climate obligation while trading their extra allowances on the market to make up the cost, and then some.

(It is important to note that such profit-making is intentional and is not considered a past-through of opportunity costs. The two are separate.)

This is part of the design of California’s cap-and-trade program, which seeks to reduce emissions to comply with the cap by allowing market forces to find where it is cheapest to do so. Yet, reducing emissions from refineries is especially important from a public health and environmental justice perspective. Not only do they release co-pollutants not covered under the program, refineries are also generally found in highly populated areas predominantly populated by people of color and/or low income.

Public Health in Wilmington and Carson

California state law defines Environmental Justice as “the fair treatment of people of all races, cultures, and income levels, including minority populations and low-income populations of the state.” There are the communities, such as predominantly Hispanic Wilmington and Carson, disproportionately affected by polluting industries. In order to address this fact, the CARB has instituted a committee to evaluate the program’s policies through the lens of environmental justice. It also has determined that a proportion of the money generated through auctioning pollution allowances will go to projects in these communities.

Amherst’s Boyce is co-author of a report analyzing the health impacts of various industries’ co-pollutants in their emissions. The report states that any carbon-charge system (cap-and-trade, carbon tax, etc.) that does not include co-pollutants in its design may run afoul of environmental justice. In California, refineries’ air toxins impact 74.3 percent of the state’s minorities, even though minorities make up only 53.3 percent of the state’s population. Moreover, out of all the sectors analyzed, refineries posed the most disproportionate burden of co-pollutants by race and ethnicity. If refineries are able to simply buy out of reducing their emissions, these issues of environmental injustice may be exacerbated even while state-wide emissions are successfully reduced. This is because minorities and people of low income would then be subject to an even larger proportion of the health burden of industrial pollution than they were before the program.

Lastly, the report cites a study that found two-thirds of the welfare gain of addressing co-pollutants in a carbon-charge system would come from 1 percent of pollution sources. The relative ease of including co-pollutants from at least the worst co-pollutant emitters makes not doing so a wasted opportunity to truly live up to California’s ideals of environmental justice.

Truthout interviewed Jesse Marquez, a lifelong resident of Wilmington and founder of an organization called the Coalition for a Safe Environment. He has had two relatives, both of whom never smoked in their life nor worked in an industrial sector, die of lung cancer. A few months ago, his nephew, aged 17, was diagnosed with lymphoma. Lymphoma has been linked with benzene, a natural constituent of crude oil and a pollutant from the refineries in his neighborhood. Jesse knows all too well the impacts of the fossil fuel industry on his community.

Jesse Marquez is against California’s cap-and-trade program, “because it gives polluters in my backyard a get out of jail card for free. It will not stop them from polluting in my community and we will continue to suffer the health effects.”

Although there will be money for renewable energies, Marquez wonders why a cap-and-trade program is needed to generate it. He also acknowledged that his community will most likely receive funds from the program in connection to its environmental justice goals. Yet, he’d prefer to see fossil fuels phased out instead of public health funds to remediate the negative impacts of the industry.

In 2006, the California Air Resources Board conducted a study on the public health effects of air pollution on the state. The study observed that overall health impacts from air pollution were costing $2.3 billion dollars annually. Compare that figure with the $230 million dollars generated through the first allowance auction in November of last year. Even if all the money from the auction went to addressing public health, it wouldn’t come close to solving the health problems associated with the burning of fossil fuels. With these facts alone, one must wonder if $10.09 per ton of CO2e is truly reflective of the price of polluting.

One must also wonder if market based cap-and-trade programs are truly the answer to the problem of global climate change. California’s dependence on fossil fuels will not be phased out, nor will a decentralized, green technology-based energy grid be created. Instead, renewable energies will complement an industry propped up to maintain its domination of the power sector. At best, the program will streamline the fossil fuel industry. But it’s still a dirty, polluting industry which should have already been on the way out. Meanwhile, Jesse Marquez and his community are still waiting for that day to come.

As James Hansen, the world-renowned climatologist, stated in response to being asked if California’s cap-and-trade program had at least some certainty of lowering emissions within the state: “It’s certain it won’t be effective. That’s what’s certain.”