Dude, where’s my “climate dividend”?

Last week the California Public Utility Commission announced (pdf) a proposed “climate dividend” totaling “$5.7B to $22.6B…returned to ratepayers.” Just a week earlier, the first auction in the California carbon market cleared at over $10 per metric ton.

Clearly, something is afoot, something big that will involve a new incentive layer for commercial facility managers. Right?

If you are in California, prepare to be disappointed. And if you’re not in California, read along to see how carbon cap-and-trade systems interact with the electricity rate structures so you can be prepared for the inevitable questions that are going to come up.

Recall that in general electricity rates are a zero-sum game. All costs are distributed to customers, so if someone’s rates go down, someone else’s rates must be going up. You want to make sure you’re on the right side of this equation.

The “climate dividend” operates along the same principle. What is artfully described as a dividend is actually the proceeds of a rate increase handed back to ratepayers. Under a cap, utilities and power generators have to purchase so-called allowances, which are essentially permits that cover their carbon footprint.

To avoid price shocks, most of these allowances are given away for free in the beginning. Even though the allowances are given away for free, however, doesn’t mean that they don’t have any value. An aftermarket exists for the allowances, because some entities get more than they need, and others have to purchase additional allowances to cover their full footprint. Hence the $10/metric ton price.

The result in California in 2013 is that utilities collected hundreds of millions of dollars by selling their free allowances in the aftermarket. Over 20 years, these aftermarket proceeds could be anywhere from $5 billion to over $20 billion.

That’s a big pot of cash, and the predictable food fight occurred over what should happen to the money. Should it be funneled to energy efficiency programs? Handed back to ratepayers? Or maybe parceled out according to an arcane formula designed to placate various political interests?

You can probably guess where this is going. Eighteen months and thousands of pages later (pdf), the final ruling is anemic and lopsided. None of the money went to energy efficiency. All of it is to be re-distributed in complex ways. Businesses that are judged economically vulnerable (mainly manufacturing) receive subsidies to reduce the impact. Small businesses under 20kW get their rate increase back, as do residential consumers. The rest of the money goes entirely to residential rate payers as a twice-yearly “climate dividend” on their bills. Noticeably absent are standard commercial customers like office buildings, who end up paying for everyone else’s subsidy.

The lessons for facility teams are pretty simple:

• Understand that cap-and-trade structurally increases rates. The rate increases in California are modest — in the 2-5% range from current rates depending on the carbon price. These amounts should be baked into the long term price forecasts for your payback models.
• The decision is another nail in the coffin of the vision of individual businesses participating in the carbon market. A few years ago, a popular idea was that energy projects could generate environmental certificates, something of value to businesses and a potential funding source. Don’t count on this ever happening.
• On the flip side, your energy efficiency projects are going to look even better due to higher energy prices.
• Commercial energy users are the losers in this zero sum game. Of course, the game isn’t over. Carbon pricing is going to be around for many years, and we should work for a system that is equitable to all ratepayers. If you’re outside California, make sure your voice is heard before carbon pricing rules are finalized.

For the diligent facility professional, your priorities remain the same. We’ll keep our heads down and try to cut as much of these extra costs as possible for our organizations.