The Greenhouse Dilemma

Governor Schwarzenegger's plan to reduce greenhouse gases could fail to reach its goals — or it could expand the use of coal power in California.

When Governor Arnold Schwarzenegger signed an executive order last
week to significantly reduce greenhouse gas emissions, he made national
headlines and received widespread praise. MSNBC, the left-leaning cable
news alternative to Fox, touted the governor’s decision on its web site
under the title, “California Gets Strongest Clean Energy Rules.” But a
closer examination of Schwarzenegger’s order reveals that the hype
surrounding it may have been overblown.

The first potential problem with the governor’s decision is that it
could prove vulnerable in the courts because he acted unilaterally, as
opposed to signing legislation approved by state lawmakers. Supporters
of two Democrat-sponsored green-energy bills that Schwarzenegger said
he plans to veto are worried that Southern California Edison, the huge
utility that serves Los Angeles, may ultimately sue to overturn the
governor’s order. This summer, Southern California Edison strongly
opposed Democratic efforts to turn California into a green-tech
economy, and it could now turn its sights on the governor’s order.

The utility could successfully argue that current law requires it to
obtain no more than 20 percent of its energy from renewable sources by
the end of next year, and that Schwarzenegger’s order to increase that
requirement to 33 percent by 2020 is invalid because an executive order
doesn’t carry the same weight as existing law. “His plan has no force
of law,” explained Matthew Freedman, a staff attorney for the Utility
Reform Network, a San Francisco-based consumer advocacy group.

Schwarzenegger’s order also can be easily rescinded by the next
governor. That probably won’t happen if Jerry Brown or Gavin Newsom
wins next year’s election, but it’s entirely possible if California
gets another Republican governor. In fact, GOP front-runner Meg Whitman
wrote in an op-ed piece last week in the San Jose Mercury News
that if elected she would sign an executive order blocking the
implementation of greenhouse-gas reduction rules. The former eBay CEO
claims the landmark environmental regulations, which stem from a 2006
law and are set to take effect early next year, “will discourage job
creation and could kill any recovery.”

The second problem with Schwarzenegger’s decision is that it could
perversely lead to a resurgence of California’s dependence on coal
power, one of the worst contributors to greenhouse gases. The reason
has to do with the governor’s desire to allow state utilities to expand
their complicated energy transactions with out-of-state power
producers, including those who use coal. “It’s safe to say that the
governor’s plan,” said Laura Wisland, a Berkeley energy analyst for the
Union of Concerned Scientists, “could prolong the life of coal plants
that would otherwise be retired.”

Wisland explained that under current California law it is illegal
for state utilities to enter into long-term energy contracts with
coal-power companies. But there is one major loophole. Utilities can
buy coal power in complicated transactions that include the use of
“renewable energy credits.” For example, San Diego Gas & Electric
currently buys renewable energy credits from a Montana wind farm.
However, the utility doesn’t actually obtain the wind-power energy,
because there is no way to effectively transmit it all the way to
Southern California. So it buys the energy and then sells it back to
the wind farm at the same price, Freedman explained.

But the utility uses the “renewable-energy credits” it also buys in
the transaction. The utility purchases energy from an Arizona producer
that depends on coal power, and then gets to call it “renewable”
because of the Montana wind-farm credits, Freedman explained. The
principle is similar to the “cap-and-trade” emissions-trading system
supported by President Obama.

Some environmentalists are concerned that Schwarzenegger’s order
will lead to a substantial increase in such transactions. The governor
has expressed a strong desire to allow utilities to meet their entire
33 percent mandate by purchasing out-of-state credits for renewable
energy that never actually makes it to California.

Supporters of the governor’s position, however, say none of that
really matters. The reason is that when California utilities buy
out-of-state credits from wind or solar farms, they’re also spurring
the growth of renewable energy throughout North America. Even if
California never uses the wind energy, someone else will, thereby
reducing the overall proliferation of fossil fuels. The Montana wind
farm, for example, sells the energy it “buys” back from San Diego to
Alberta, Canada. And so, from a global-warming perspective, it doesn’t
matter whether California, Montana, or Canada uses the green energy,
because the ultimate goal is to limit global greenhouse-gas

Still, the governor’s plan could prolong the life of coal-powered
plants because coal power is cheap and because utilities will be able
to effectively buy it with their credits. (Utilities also like
fossil-fuel power because it’s more reliable than wind and solar
energy, which are produced only when the wind blows and the sun
shines.) Moreover, if California’s electricity needs increase with the
widespread use of electric and plug-in vehicles, then the state’s
demand for out-of-state power could extend the life of coal-powered
plants even longer. It’s highly unlikely that new coal plants will be
built to fulfill the state’s needs because they’re too costly to

Schwarzenegger’s move also could reduce the amount of money that
will end up being dedicated to the creation of a California green-tech
economy. That’s another reason why Democrats proposed limiting
transactions like the San Diego-Montana-Arizona deal. The Democratic
bills passed by both houses of the legislature earlier this month would
limit the purchase of out-of-state green energy credits to one-quarter
of the 33 percent mandate. This limitation would force utilities to
purchase more green energy from homegrown producers, or from
neighboring states that could actually transmit it to California.

Not surprisingly, some California green-energy companies strongly
supported the Democratic bills. Backers included Oakland-based
BrightSource, a solar company that recently announced that it’s
building several installation in the Mojave Desert. The Democratic
bills would guarantee greater demand for more such projects in the

So what needs to happen? Clearly, it would be better if Democrats
and environmentalists went back to the bargaining table and reached a
compromise with the governor. Legislation signed into law is much less
vulnerable to an adverse court ruling or to the whims of a future
Republican governor.

One possible compromise would be to limit the amount of coal power
that utilities can effectively purchase with out-of-state credits.
Another would be to find a middle ground between the unlimited credits
that the governor proposes and the 25 percent maximum proposed by
Democrats. Something in the neighborhood of 50 percent to 60 percent
could provide the flexibility that the governor wants utilities to have
while also providing the necessary pressure to close those old coal
plants and help the state build a green economy.


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