In a sweeping climate change proposal that could serve as a model for the nation, two California agencies have proposed a comprehensive program for reducing the state’s greenhouse gas emissions that calls for aggressive improvements in energy efficiency, higher targets for renewable energy, and an innovative scheme for allocating emission allowances to electric utilities.

The proposal, rolled out in September by the California Energy Commission and the California Public Utility Commission, is designed to allow California to meet a mandate in the state’s landmark climate change statute (AB 32) to return overall greenhouse gas emissions to 1990 levels by 2020—a reduction of 11% below current levels and a 29% cut from projected 2020 levels.

The proposal completed public review and comment on October 16 and was given a thumbs up by the respective commissions on October 16 and sent to the California Air Resources Board (CARB), the agency chosen by the legislature as the final authority responsible for implementing the climate change program.

The proposal, which builds on interim recommendations released in February, embraces energy efficiency as its “cornerstone,” calling for the state’s investor-owned and municipal utilities to capture “all cost-effective energy efficiency.” This simple-sounding goal is ambitious, given that California already is by far the most energy-efficient state in the nation, having kept per capita electricity consumption flat over the past 30 years despite strong population growth.

“We believe that, in order to meet the greenhouse gas reduction goals of AB 32 more efficiency is required,” the commissions said in the proposal. “With intensified efforts in building and appliance standards and utility programs, and with new strategies and technologies, the state can capture all cost-effective energy efficiency.”

Moving Targets

As for the renewables target, the commissions said clean energy development is “crucial” if California is to meet a far more stringent AB 32 mandate of slashing emissions by 80% below 1990 levels by 2050.

In the February proposal, the commissions recommended boosting the current renewable portfolio standard of 20% by 2020, but stopped short of specifying a new target. In the September proposal, they called for electric utilities to obtain a third of their electricity from renewable resources by 2020. That’s three times the amount of green energy California utilities currently obtain and a 60% increase in the state’s existing standard.

“We believe that a target of 33% renewables by 2020 is achievable if the state commits to significant investments in transmission infrastructure and key program augmentation,” the commissions said.

Carbon Trading Favored

Unsurprisingly, given the broad political support for using market-based approaches to reduce emissions, the proposal recommends that CARB establish an emissions trading program to help utilities and other industries reduce their emissions at the lowest cost.

The most innovative component of the proposal addresses the controversial issue of how to allocate allowances utilities would need to comply with an emissions cap. The compromise allocation scheme is designed to simultaneously accommodate utility demands for free allowance allocations, consumer demands for auctioning all allowances, and environmentalist demands for distributing allowances based on the efficiency of the generating source rather than on its historical emissions.

Under the proposal, utilities beginning in 2012 would be given 80% of the allowances they need at no charge, with the remainder sold at auction. Over the next five years, the percentage auctioned would increase by 20% annually, so that by 2016, 100% of the allowances would be auctioned.

The free allowances would be distributed only to generating utilities based on their energy output and would be weighted based on the fuel source of the delivered electricity. The commissions said this approach gives utilities an incentive to reduce the carbon content of their power, which would free up allowances they then could sell in a state or regional allowance market.

All—or almost all—of the auctioned allowances would be granted to distribution utilities, who would be required to sell the allowances in an independent, centralized auction and would receive the auction revenues. This wrinkle would ensure that distribution utilities receive the funds they need to reduce rates, boost efficiency programs, invest in renewable technologies, or finance other climate-friendly purposes.

In another innovative element of the scheme, the allowances to be sold at auction would change over time, from allocation initially on the basis of historical emissions in a distribution utility’s portfolio to, by 2020, allocation on the basis of electricity sales. This provision would favor low-carbon generation while preventing a distribution utility from being penalized by population increases in its service territory.

The proposal recommends that CARB consider retaining a small portion of the total emission allowances from electricity sales to fund statewide energy programs.

The proposal also calls for CARB to strongly consider structuring a trading program to facilitate California’s participation in a regional trading program, given the impact of imported power on California’s emissions. The state imports 22% of its electricity, and imports account for 13% of its emissions. In-state generation, however, accounts for 12%.

California is a member of the Western Climate Initiative (WGI), which comprises seven states and four Canadian provinces. The WGI last week unveiled an emissions cap-and-trade proposal aimed at reducing emissions by 15% below 2005 levels by 2020.

—Chris Holly (cholly@accessintel.com) is a reporter for COAL POWER’s sister publication, The Energy Daily.