2015: The Year Cap-and-Trade Costs Take a Toll

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Over the past two years CLFP has been engaged in negotiations over specific aspects of California’s cap-and-trade regulation affecting food processors and the food processing industry. The program started on January 1, 2012, with an enforceable compliance obligation beginning with the 2013 greenhouse gas (GHG) emissions. In 2013, the cap-and-trade will require all facilities that emit more than 25,000 tons of CO2e annually to provide allowances for each ton of emissions during a three year period. If your facility emits more than 25,000 tons of CO2e annually you are subject to the AB 32’s cap-and-trade.

January 1, 2015 is the start of the second compliance period. At that time, food processors subject to the cap-and-trade will receive only 75 percent of their allotted free allowance. The reduction is a direct result of the medium leakage risk that CARB has designated for food processors. Food processors subject to the cap will be required to either reduce their emissions or purchase the additional allowances from the market.

Also in 2015, all natural gas suppliers and transportation fuels will become subject to the cap on emissions. As there are no free allowances for these fuel providers, the total costs for the purchase of any allowances will be borne by these fuel providers. As a result, downstream users of natural gas, gasoline, diesel, and other fuels will see these costs passed down, mostly as increases in fuel and energy bills.

For food processors, the key section in the cap-and-trade regulation is Section 95852(c) of the Health and Safety Code concerning the inclusion of natural gas:

Section 95852(c)
(c) Suppliers of Natural Gas. A supplier of natural gas covered under sections 95811(c) and 95812(d) has a compliance obligation for every metric ton CO2e of GHG emissions that would result from full combustion or oxidation of all fuel delivered to end users in California contained in an emissions data report that has received a positive or qualified positive emissions data verification statement or for which emissions have been assigned, less the fuel that is delivered to covered entities, as follows:

1. Suppliers of natural gas shall report the total metric tons CO2e of GHG emissions delivered to all end users in California pursuant to section 95122 of MRR; 
2. ARB shall calculate the metric tons CO2e of GHG emissions for natural gas delivered to covered entities which are customers of the supplier. The emissions will be calculated according to section 95122 of MRR using the reported deliveries (in mmBtu) in emissions data reports that received a positive or qualified positive emissions data verification statement, or the assigned emissions from natural gas delivered to the covered entity by the supplier of natural gas;
3. ARB shall provide the supplier of natural gas a listing of all customers and aggregate natural gas (in mmBtu) and emissions calculated from the supplier’s natural gas delivered to covered entities; and
4. The Executive Officer shall calculate the metric tons CO2e for which the supplier will be required to hold a compliance obligation based on the supplier’s reported emissions less ARB’s calculated emissions from deliveries to covered entities which are customers of the supplier. The Executive Officer shall provide this value to the supplier of natural gas within 30 days of the verification deadline in section 95103 of MRR.

Depending upon the cost and availability of allowances from 2015 on, all Californians, including businesses, whether above or below the 25,000 emissions limit, can expect to see significant cost increases in all aspects of production due to the carbon adder resulting from natural gas and fuels coming under the emissions cap. The amount of the adder will depend upon the cost of the allowances sold at the cap-and-trade auction.

However, because CARB has built in an automatic price increase into the allowances for each compliance period, the minimum, or floor, cost for the allowances in 2015 will be approximately $14. In previous presentations CARB has forecast the cost of compliance instruments at up to $20 per ton CO2e by 2020. But the cost of allowances as of this writing is $18.25 bid and $18.50 ask. They are already way off base. At this rate, allowance costs forecasts of $75 ton CO2e or more is on its way to becoming a reality.

For those companies already subject to a compliance obligation under the cap-and-trade there will be an adjustment factor to prevent double payment. However, everyone else should expect these costs to be passed through on their utility and natural gas bills or see increases at the gas/diesel pump.
This presents some real problems for the food processing industry. At the same time that energy costs are rising for growers, truckers, and other businesses supplying the food processing industry, food processors will be dealing with the loss of 25 percent of the free allocations as mentioned above.

Other Risks for Facilities Under 25,000 CO2e
However, there might be an unpleasant surprise for those food processors that are not subject to the cap-and-trade. While their lower emissions levels will continue to exempt them from inclusion in the cap-and-trade, some could end up paying MORE than a similar facility that is subject to the cap-and-trade. This is because unless you are in the cap-and-trade, you will not receive any free allowances.

For instance, a facility emitting 25,001 tons of CO2e annually will receive 75 percent of its allowances free up to its efficiency benchmark in the second compliance period beginning 2015. But a facility emitting 24,999 tons annually will receive no free allowances. Because the cost of the allowances will account for both the cost to the obligated facility as well as be a factor in determining the amount of the carbon adder, if the cost of allowances drives the carbon adder up significantly, the lower emitting facility (under 25,000 ton of CO2e) will be subject to the total cost of the carbon adder through its utility and gas bills. On the other hand, the obligated facility will only be exposed to 75 percent of those costs due to its allowance allocation. There are no cost increase estimates for natural gas, but transportation fuel expect $2.50 a gallon increase that will be passed on to consumers.

While there is some speculation that CARB may try to provide additional free allowances to utilities (such as is currently the case with electric utilities) to be used to mitigate the cost to consumers of bringing natural gas and transportation fuels under the cap, no formal efforts are yet underway.

If the regulation remains in its current form, any companies that are big users of natural gas, not currently subject to the cap-and-trade, should be prepared for substantial increases in costs of production come 2015.

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