As interest in the Western Energy Imbalance Market ("EIM") grows, regulators at the California Air Resources Board ("CARB") are facing concerns, once again, about carbon leakage from the state's mandatory cap and trade program under AB 32. In the context of carbon markets, leakage describes the phenomenon in which a local (in this case, California) regulation depresses local demand for high-carbon electric generation, causing high-carbon generation to shift—even if only on paper—to neighboring, unregulated, regions. Leakage, in effect, causes California to recognize a carbon reduction when none has actually taken place. In the past, California has faced this problem in the context of default emissions rates for power scheduled into the California market and from the "reshuffling" of resources to strategically reduce AB 32 compliance costs.
Now California is again facing a leakage problem as it grapples with the implementation of the Western EIM, which allows out-of-state entities to participate in California's real-time market. The EIM is dispatched using a cost-optimization model that takes into account the cost of compliance with California's Carbon regulation, but which is based on "deemed delivery" under the market rules as opposed to actual delivery. This results in some high-carbon resources used to serve California load being unaccounted for under AB32. CARB explained this in a report released in August:
The EIM cost optimization model sometimes identifies zero-emissions power as dispatched to California before high-emitting resources are deemed dispatched to the State when there is a load imbalance. Clean out-of-State resources (e.g., hydropower), are "deemed delivered" to California, and the Cap-and-Trade Regulation assigns the scheduling coordinator for those resources with a compliance obligation. The model's "deemed delivered" result is treated as determining that resource as a source for a specified power import. However, in certain instances, the full transfers that support balancing load to California are not identified and accounted for in the Cap-and-Trade Program, resulting in emissions leakage.
This report proposes regulatory changes to prevent such leakage by requiring supplementary accounting of greenhouse gas emissions from out of state.
California's challenge in continuing to refine and implement its state-level cap and trade program while participating in a growing regional electricity market are instructive as state and federal regulators continue to consider electric market integration and carbon regulation. The Clean Power Plan, which is still under review in the courts, will add another layer of complexity to the challenge if it is ultimately upheld. While California is currently at the forefront of these kinds of efforts as the world's sixth largest economy, other western states can expect to face similar issues in the future as power-industry regulators and firms move forward simultaneously toward greater market integration and carbon regulation at the state level.
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