HB 2017~A Sound Start to State Policy on Greenhouse Gas Emission

HB 2017 (S/E on greenhouse gases; fuel economy) ensures that the Legislature determines Arizona's policy on greenhouse gas emissions.

It would provide critical session law that prescribes a clear and certain process, whereby the ADEQ Director submits recommendations to the Legislature, the Arizona Corporation Commission and the Governor. The bill specifies that no state agency (e.g. DEQ, Commerce) could proceed with rulemaking for a greenhouse gas or motor vehicle fuel economy program without explicit legislative authorization enacted in the future.

This legislation reflects the Constitutional requirement that there is a separation of powers between the responsibilities of the Legislature to determine public policy, and the responsibilities of the Executive to implement that policy. Because of the magnitude of this policy proposal, and the cross-over into jurisdiction of the elected members of the Arizona Corporation Commission, it is especially important that this legislation be enacted.

BACKGROUND: The Western Climate Initiative ("WCI") is a group of several western and Mexican states, and Canadian provinces that have committed to reducing the emission of greenhouse gases ("GHG"). The WCI is divided into two groups: partners who have, by agreement, committed to specific GHG reductions and; observers who are monitoring the process.

The committed partners are Arizona, British Columbia, California, Manitoba, Montana, New Mexico, Oregon, Utah and Washington. These states are in the process of developing an economy-wide regional cap-and-trade program. A cap-and-trade program is a market mechanism in which carbon emissions are capped and entities participating can trade allowances to meet the emissions limit or to grow. The observers are Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Ontario, Quebec, Saskatchewan, Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora and Tamaulipas.

WCI has been meeting since October with a goal of making design recommendations for a regional cap-and-trade program by August of this year. Each state would then be eligible to implement its own cap-and-trade program consistent with those recommendations.

The Director of ADEQ has stated that the recommendations for a cap-and-trade program can be implemented without additional legislative authorization. In contrast, other states such as Washington have recently enacted legislation requiring their lead agency to obtain authority from their legislature to implement the WCI recommendations.

Such a program will have a significant impact on Arizona's economy and could worsen the State's budget crisis.

A policy proposal of such magnitude is complicated. Determining the regulatory structure of a cap-and-trade program requires detailed decisions, including determinations as to which state agency is most qualified to oversee/regulate the market trades that would occur, should allowances be auctioned to entities or distributed for free, if they are auctioned, how the significant amounts of money collected from auctions will be spent, how do you mitigate the costs impacts of such a program to low income families and whether sources of carbon not currently included in the WCI's scope of regulations (e.g. agriculture) should be eligible to provide credits to offset required reductions. These are just a few of the many policy decisions that are the responsibility of the Legislature to determine. A number of parties are concerned that bypassing the legislature on such an important policy question is wrong.

• Making cap-and-trade program decisions through State agency rulemaking, for example by ADEQ, is problematic:
  
  • Program choices must be based on consensus-driven, well-researched decisions and a process that includes all stakeholders.
    
  • ADEQ does not have the resources or expertise to administer a market-based program.
    
  • No state agency has the legal authority to adopt and administer a cap-and-trade program.
    
  • Agency rule-makers are at least a layer removed from accountability to elected officials.
    
  • Agency rulemaking excludes indispensable stakeholders – State Legislature, Corporation Commission.
    
  • If the cap-and-trade program includes the auctioning of allowances, revenue will be generated from the auction proceeds. The state legislature should determine how this revenue will be distributed.
    
• It is expected that the federal government will enact climate change legislation next Congress. All three presidential candidates support climate change legislation. Jumping the gun before there is national legislation with state or regional program has disadvantages including:
  
  • a limited number of market participants are available for trading;
    
  • California values will dominate the program;
    
  • risk of checkerboard of programs nationwide with no ability to move allowances between programs;
    
  • Arizona is more reliant upon coal based generation resources than other states and the design of the program could result in transfer of wealth to other states;
    
  • and Arizona companies will be at a competitive disadvantage if other states fail to participate.
    
• The WCI has just started the process of conducting an economic analysis of the proposals under consideration. But we know from analysis of similar programs at the federal level that economic impacts are significant. The economic estimates vary greatly depending upon the assumptions used, the reduction strategies employed and the available technology. Some examples of the potential costs are:
  
  • The Electric Power Research Institute (an independent, nonprofit center for public interest energy and environmental research) estimates that cost to reduce carbon emissions could result in electricity rate increases of 45% to 260%, depending on the strategies employed to reduce emissions and the available technologies.
    
  • EPA analysis of federal legislation to reduce GHG sponsored by Senators Lieberman-Warner also concluded electric utility rates could increase by as much as 44% by 2030.
    
  • Costs increases will be felt even more by lower income households. The Oregon Center for Public Policy recently noted that the cost of reducing carbon emissions by 15% would cost the poorest one-fifth of households $750 to $950 yearly. These are households where the average annual income is $13,000.
    
  • An EPA analysis of Lieberman-Warner concluded that it would reduce our nation's GDP in 2050 by 2.37%.
    

###