Speaker 1: We got a weird one for you today. It's about
Speaker 1: how greenhouse gas emissions are plummeting and that's actually somehow
Speaker 1: bad for climate change. Stay tuned, all will be explained. Hello,
Speaker 1: you're listening to Parts per Billion, the environmental podcast from
Speaker 1: Bloomberg Law. I'm your host, David Schultz. So you may
Speaker 1: have seen or heard a lot of journalists, including myself,
Speaker 1: on this very podcast, talk about how the sudden drop
Speaker 1: in economic activity due to the pandemic has actually had
Speaker 1: a positive effect on the environment. For example, fewer daily
Speaker 1: commuters on the highway means less greenhouse gases coming out
Speaker 1: of tailpipes. So this would seem like a small silver
Speaker 1: lining in an otherwise horrendously awful situation. Except it's not,
Speaker 1: or at least not in the state of California. In
Speaker 1: one of the supreme ironies of the pandemic, the Golden
Speaker 1: State may actually be a victim of its own aggressive
Speaker 1: climate change regulations. That's because one of the main ways
Speaker 1: California regulates climentimate change is through a so called cap
Speaker 1: and trade system for greenhouse gases. We'll get into this
Speaker 1: a lot in just a second, but basically what the
Speaker 1: state does is it sets a cap on the amount
Speaker 1: of greenhouse gases you can emit, and then it forces
Speaker 1: emitters to buy permits essentially that offset their overages. If
Speaker 1: that sounds complicated, that's because it is. But the main
Speaker 1: problem is that it was designed assuming that there would
Speaker 1: always be companies that would exceed the cap, and thus
Speaker 1: there would always be overages to be traded. Well, not anymore.
Speaker 1: David R. Baker, a Bloomberg News energy reporter based in
Speaker 1: San Francisco, has been reporting on California's cap and trade system,
Speaker 1: and he says some really weird things have been happening
Speaker 1: with it the past few months. David joins us to
Speaker 1: explain how the system works and what's going wrong. Cap
Speaker 1: and trade is one of the central programs to the
Speaker 1: way California fights climate change. It's not the only one
Speaker 1: by a long shot, but it's one of the biggest,
Speaker 1: and I think easily the most complex, and eventually it
Speaker 1: is a system that sets up a kind of market
Speaker 1: for the right to put carbon dioxide or other greenhouse
Speaker 1: gases into the atmosphere. It's very, very complicated the way
Speaker 1: the state created it, but the principle is simple enough.
Speaker 1: For every ton of greenhouse gases that a company wants
Speaker 1: to admit, they have to buy a permit called an allowance.
Speaker 1: An allowance, OK, the number of allowances that are available
Speaker 1: in any given year matches the cap that sort of
Speaker 1: top that the ceiling that the state has set on emissions.
Speaker 1: That cap goes down bit by bit year by year,
Speaker 1: so the state allows fewer emissions every single year. And
Speaker 1: if you're out there emitting greenhouse gases, you still have
Speaker 1: to pay for each ton that you put out there,
Speaker 1: so it'll get a little bit harder and a little
Speaker 1: bit more expensive year by year. Also, the state sets
Speaker 1: a floor price for these allowances, so that price is
Speaker 1: guaranteed to go up bit by bit as the system
Speaker 1: goes along. So you're right, it is pretty complicated, but
Speaker 1: it actually sounds kind of clever. It's sort of an
Speaker 1: interesting way to bring in market forces to kind of
Speaker 1: regulate carbon emissions. So who are the people who are
Speaker 1: buying these allowances, the ones who are going over their
Speaker 1: caps and need to essentially pay to be able to
Speaker 1: put more carbon into the atmosphere. Yeah, the people the
Speaker 1: companies who are buying the allowances, A lot of them
Speaker 1: are ones that you would expect. So we have an
Speaker 1: oil industry here in the state, a big one with
Speaker 1: a lot of oil refineries. So those refineries and the
Speaker 1: companies that own them, like Chevron and Tsorro are out
Speaker 1: there and every year buying up these allowances. People who
Speaker 1: operate power plants are in there buying allowances. But you
Speaker 1: also see entities in there that are purely financial. So
Speaker 1: JP Morgan is always in there buying allowances. Banks are
Speaker 1: are they What are they doing with these allowances? It's
Speaker 1: an investment. You know that there are people out there
Speaker 1: who are going to need to buy these at some
Speaker 1: point or another. And you also know, if you're a bank,
Speaker 1: that the price of these things is going to go
Speaker 1: up bit by bit no matter what. So if you've
Speaker 1: got if you've got the ability to buy them and
Speaker 1: hold them for a bit, you know you can actually
Speaker 1: make money. That's wild. So this is almost it's like
Speaker 1: they've created a thing of value and that thing of
Speaker 1: value is going to go up, and now you have
Speaker 1: investors who are interested in buying it. That's that's really fascinating. Yeah.
Speaker 1: So yeah, essentially, the state has created a market for
Speaker 1: carbon emissions, like there's a market for corn or soy
Speaker 1: or copper, And let's get into what's happening right now.
Speaker 1: It sounds like that market is failing or it's not
Speaker 1: doing what it's supposed to be doing. So what's going
Speaker 1: on is this? Are these allowances now worthless? Like, what's
Speaker 1: happening with this market that the state of California created? Well,
Speaker 1: the market has been hit by the pandemic pandemic lockdown
Speaker 1: like just about everything else, because suddenly nobody was driving
Speaker 1: to work. Sales of gasoline fell off a cliff, all
Speaker 1: the factories closed, all the offices closed down, and the
Speaker 1: economy was putting out far less carbon emissions than anyone expected.
Speaker 1: We don't know exactly how much less, but I know
Speaker 1: the oil refineries in the state were processing like a
Speaker 1: third less oil than they normally do, so it's a
Speaker 1: pretty big hit. And suddenly all these companies that needed
Speaker 1: to be in this market buying permits for their greenhouse
Speaker 1: gas emissions didn't have as many emissions that they had
Speaker 1: to cover, so they didn't have to buy as much.
Speaker 1: And you first saw a big drop in prices on
Speaker 1: the secondary market for these allowances. And this is the
Speaker 1: market where you have the investors buying and trading there's
Speaker 1: like a three day period where it absolutely crashed, but
Speaker 1: then it started coming back up again. The main thing
Speaker 1: that we just saw this past month is these allowances
Speaker 1: get sold off by the state in quarterly auctions, and
Speaker 1: the auction that was held this past month just tanked.
Speaker 1: The amount of money that the state got out of
Speaker 1: it is just a tiny fraction what they usually do.
Speaker 1: I think they got about six percent of the revenue
Speaker 1: that they got from the previous auction. It went from
Speaker 1: I think six hundred and thirteen million dollars in revenue
Speaker 1: to the state in February to twenty five million in May. So, yeah,
Speaker 1: it was a big hit. We're going to take a
Speaker 1: quick break for a moment, but when we come back,
Speaker 1: we're going to dig into the irony of this whole
Speaker 1: situation and talk about the impact this could have on
Speaker 1: California's budget. Stay with us, welcome back. We are talking
Speaker 1: to Bloomberg News is David R. Baker from his home
Speaker 1: in San Francisco, California. He says, it's not just investment
Speaker 1: banks they are taking a bath here on these carbon allowances.
Speaker 1: The state itself is going to get hurt big time
Speaker 1: by the sudden shift when the governor in mid May
Speaker 1: put out his revised budget, showing just how badly he
Speaker 1: thought everything was going to get hit by the pandemic shutdown.
Speaker 1: He was quite explicit about that. There's a section of
Speaker 1: the budget that says, we know we're going to get
Speaker 1: much less money out of the source for the rest
Speaker 1: of the year, so we're going to prioritize things. There's
Speaker 1: only a handful of the programs that we would normally
Speaker 1: fund that we're going to fund now. They windowed it
Speaker 1: down to four high priority items. Usually there's a couple
Speaker 1: a dozen of programs that this thing constantly feeds money into.
Speaker 1: What are some examples of things that aren't going to
Speaker 1: be funded this year. I didn't see you mention of
Speaker 1: the clean vehicle rebates, so I think that may be
Speaker 1: running on fumes, as it were. And just to clarify,
Speaker 1: that's a rebate that the state gives you if you
Speaker 1: buy a let's say, an electric car. So that's money
Speaker 1: that you if you're you know that won't incentivize people
Speaker 1: to purchase, you know, electric cars and things like that, exactly.
Speaker 1: There's a state rebate for buying an electric car. There's
Speaker 1: a state rebate for hydrogen fuel cell cars too, and
Speaker 1: that's been a pretty good incentive over the last ten years.
Speaker 1: It's one of the reasons why we're the biggest electric
Speaker 1: vehicle market in the US by a long shot. But yeah,
Speaker 1: suddenly this this source of funding is getting seriously squeezed.
Speaker 1: This is one of the reasons why I really I
Speaker 1: love the story that you wrote on this is because
Speaker 1: it's so ironic, like you have a huge drop in
Speaker 1: the amount of greenhouse gas emissions that are going into
Speaker 1: the atmosphere, and yet that makes it somehow harder for
Speaker 1: the state to regulate climate change. I mean, do you
Speaker 1: think that based on that this is like a fundamental
Speaker 1: flaw in the way the state has gone about this
Speaker 1: or is this just really a blip and you know,
Speaker 1: once things go back to normal, the state's plan, this
Speaker 1: cap and trade program, will you know, begin working the
Speaker 1: way it was supposed to do. I think it's I
Speaker 1: think it's too painful to call a blip, but I
Speaker 1: do think it'll be a temporary thing. None of the
Speaker 1: people I've talked to who actually, you know, follow this
Speaker 1: market day to day are worried that it's collapsing or
Speaker 1: that it's somehow failing, and the state is extremely committed
Speaker 1: to making sure it runs. And when they set it up,
Speaker 1: they created so many rules about how the market operates
Speaker 1: that it's just maddening to wrap your brain around them.
Speaker 1: But some of those rules are actually designed for situations
Speaker 1: like this. They have a mechanism for basically removing any
Speaker 1: allowances that don't get sold. They can pull those out
Speaker 1: of the market so that they don't flood things for
Speaker 1: years to come. So I do think as the economy reopens,
Speaker 1: you'll start to see the revenue in this system coming
Speaker 1: back up again. But yeah, it's incredibly ironic. I mean,
Speaker 1: the dropping emissions that we've had over the last couple
Speaker 1: of months is what environmental community dreams of. They would
Speaker 1: love to see that, but instead because of why it happened. Yes,
Speaker 1: it's throwing a big monkey wrench into the tools that
Speaker 1: we usually used to lower emissions. That's it for today's
Speaker 1: episode of Parts per Billion. If you want more environmental news,
Speaker 1: check out our website newstot Bloomberg environment dot com. That website,
Speaker 1: once again is Newstop Bloomberg environment dot com. Have any
Speaker 1: thoughts about what you just heard, or really about anything else,
Speaker 1: hit us up on Twitter. We use the handle at Environment.
Speaker 1: Today's episode of Parspabillion was produced by myself along with
Speaker 1: Josh Block and Marissa Horn. Parts per billion was created
Speaker 1: by Jessica Coombs and Rachel Dago. The music for today's
Speaker 1: episode is a message by Jazar and Surf Queen by
Speaker 1: Leydon Cordell. They were used under a Creative Comments license.
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