California Pact Would Place CapOn Emissions

Anti-Global-Warming Effort Faces Business Opposition; A Split With Washington

By JEFFREY BALL and JIM CARLTON

August 31, 2006; Page A1

California , the nation's most populous state and a longtime bellwether on environmental policy, will impose the first broad cap in the U.S. on greenhouse-gas emissions, in a clear break with the federal government over global warming.

Leaders of the state legislature and Gov. Arnold Schwarzenegger announced a deal yesterday under which California will mandate a reduction in the state's emissions of gases contributing to global warming to 1990 levels by 2020. The cut would target the state's biggest industrial emitters of greenhouse gases, such as power plants, oil refineries and cement factories. California already has passed a law requiring greenhouse-gas-emission cuts from cars and light trucks sold in the state.

The cut's effect on individual industries, companies and consumers is unclear, because the state has yet to work out details of how it will implement the broad emissions mandate. But backers of the measure, including Gov. Schwarzenegger, said it won't unduly harm business in the state.

Still, the effort faces almost certain legal challenges. Business groups have said such restrictions will boost production costs and make the state less competitive. "We don't think it looks like a very good deal for business and industry in California ," said Jack Stewart, president of the California Manufacturers and Technology Association, an industry trade group in Sacramento .

The measure still must pass both houses of the state legislature to become law, but the agreement by Gov. Schwarzenegger and the majority leaders of both houses all but ensures that outcome. "We can now move forward with developing a market-based system that makes California a world leader in the effort to reduce carbon emissions," Gov. Schwarzenegger, who is running for re-election this year, said yesterday, when the agreement was announced.

California , the world's sixth-largest economy, accounts for only about 2% of the world's annual global-warming emissions. But California leaders made clear their intent is to spur other states, and ultimately the federal government, to follow the state's lead. That has happened with a string of past environmental regulations, notably restrictions on automotive pollution.

"Today it feels as if the whole world is watching, and I hope they are. This shows California knows how to do it right," said Ann Notthoff, California advocacy director for the environmental group Natural Resources Defense Council.

Addressing global warming is more difficult than addressing air pollution. Rather than bolting a filter onto a smokestack or auto tailpipe to reduce the emissions when fuel is burned, it requires re-engineering factories and cars so they burn less fuel in the first place. The main greenhouse gas, carbon dioxide, is produced when fossil fuels like coal and gasoline are burned.

The Bush administration -- which has rejected the international Kyoto Protocol emissions-reduction treaty -- reacted tepidly to word of the California push. "The states are free to make their own decisions about their policies," said Kristen Hellmer, a spokeswoman for the White House Council on Environmental Quality. But she reiterated the administration's philosophical opposition to global-warming caps, saying a cap imposed in one state or country simply causes industry to move to another location. "They're going to still produce greenhouse gas," she said.

California 's goal is less ambitious than the cut envisioned in the Kyoto Protocol. Industrialized countries that ratified Kyoto have pledged to reduce their global-warming emissions a collective 5% below 1990 levels between 2008 and 2012. The U.S. has declined to ratify Kyoto , saying it would hobble the nation's economy. California 's goal equates to cutting its emissions by 25% in 2020 below the level the state projects it would otherwise reach that year.

This isn't the first attempt by a U.S. state to mandate global-warming reductions in the absence of federal efforts to require emissions cuts. California itself has passed a law mandating a cut of about 30% in global-warming emissions from new cars and light trucks sold in the state by 2016. The auto industry has sued to block that measure, saying it violates federal law because it amounts to a back-door state effort to go beyond federal fuel-economy measures. The case is pending in federal court in California .

In addition, seven New England states have adopted a regulatory scheme that covers carbon dioxide emissions from power plants and California , Oregon and Washington are considering a similar measure. But the law announced by California leaders yesterday would go far beyond those measures, applying to all sectors of the economy.

Industrialized countries that have ratified the Kyoto Protocol have found that agreeing to a broad reduction target is just the first step. Far more difficult is apportioning responsibility for coming up with those cuts among politically powerful businesses -- let alone individual car-driving voters -- within their borders. Many countries that have ratified the treaty have struggled to reduce emissions.

California 's effort would direct the California Air Resources Board, the state agency that enforces California 's clean-air rules, to come up with the details. The broad requirements of agreement stipulate that, by January 2008, the air board start requiring the state's major greenhouse-gas producers to report their greenhouse-gas output. By January 2009, the air board is to develop a plan outlining how to achieve the emissions cuts. By January 2011, the air board is to adopt actual rules to take effect a year later.

One major source of disagreement during negotiations involving lawmakers, business groups and others was the degree of flexibility California would offer businesses. Business representatives wanted a guarantee that the state would include a mechanism allowing companies to buy and sell carbon-dioxide-emission permits among each other as needed, to soften the potential financial blow. But some environmentalists argued that would make it too easy for California businesses to avoid cleaning up their own operations. The final legislation says the state "may" include such a trading mechanism in its final plan.

On the federal level, Republican Party leaders and President Bush have opposed adding carbon dioxide to the list of air pollutants regulated by the government. But that could change if Democrats take control of the House and Republican control over the Senate is weakened in November elections, as some political analysts now predict.

One reason Gov. Schwarzenegger ended up agreeing to the bill was that some of California 's business community supported it. He began tipping his support toward the bill after a delegation of executives from Silicon Valley last week told him many businesses wanted the bill as a way to provide them regulatory certainty and for other reasons, say lobbyists in the statehouse.

"This bill provides a new opportunity here in California ," said Bob Epstein, cofounder of Sybase Inc., a software maker in Dublin , Calif. , and a leader of a group that represents businesses that support environmental action.

The bill's opponents included oil and natural gas companies. They also oppose an initiative set for the state's November ballot that would tax oil produced in California to fund alternative energy efforts. Yesterday's agreement "will have a severely negative effect on the affordability and reliability of California 's energy supply, jeopardizing California 's economy and our global competitiveness," said Allan Zaremberg, president and chief executive of the California Chamber of Commerce.

California has lost jobs in many of the industries that likely would face the effects of emissions caps, even as total private-sector employment has risen, according to Bureau of Labor Statistics data. For example, employment in the primary metals manufacturing industry fell 14% last year compared with 2001.

The Republican governor took on liberal constituencies last year but he has been tacking left in recent months to shore up his political support in this Democratic-leaning state. He recently authorized a $150 million loan to California 's stem-cell program that will allow it to begin funding research restricted by the federal government, handing a lifeline to the initiative while the courts resolve lawsuits that question its legitimacy.

--John J. Fialka contributed to this article.

Write to Jeffrey Ball at jeffrey.ball@wsj.com 1 and Jim Carlton at jim.carlton@wsj.com2