The Case Of The Flatulent Fugitive: How California’s Methane Monster Escaped The Carbon Cap (And How To Nab It)

We all make mistakes – that’s why pencils have erasers and renters have insurance. If we add some numbers wrong, we can erase them and start over; but if we burn down the neighbor’s house, we can’t “un-burn” it by labeling it a mistake. Instead, we have to offset our damage by paying to rebuild it.

Likewise, the Southern California Gas Company can’t “un-spew” the 83,000 metric tons of climate-changing methane that it passed into the gentle wind above Porter Ranch, Los Angeles these past few months just by labeling it a mistake (which it has); but it does have to make the 2,300 neighbors whole – as well as the rest of the planet, perhaps in part by paying to suck the methane out of a few hundred dairy farms before it leaks into the air.

Governor Jerry Brown seems to be angling for a solution like that – but shouldn’t such a solution be automatic and mandatory? After all, California’s cap-and-trade system expanded to cover the oil-and-gas sector last year, which means an oil-and-gas company that exceeds its “cap” must then “trade” to extract as much methane from the atmosphere as it spewed into it.

But SoCal Gas is under no such obligation, because the Porter Ranch plume is comprised of “fugitive emissions”, which are “those emissions which are unintentional and could not reasonably pass through a stack, chimney, vent, or other functionally-equivalent opening,” according to the California Air Resources Board (CARB), which oversees the state’s cap-and-trade system.

Accidental discharges, in other words, aren’t covered by the cap, and it’s not clear how they’ll be factored into the oil-and-gas sector’s total emissions, either. They are, from a cap-and-trade perspective, “un-spewed” – “erased” – like a math error corrected instead of a massive, made-made disaster that’s capturing heat and accelerating climate change.

This doesn’t mean California lawmakers are sitting idle. Last week, they took steps to make sure SoCal Gas cleans up its mess, and Governor Jerry Brown says he’ll force the company to offset its emissions by support projects that reduce emissions elsewhere – essentially prodding them to do in an ad hoc way what they would have have been forced to do automatically under cap-and-trade.

But that’s a dirty and murky political solution for a problem that could be handled with clarity, transparency, and accountability – and it would be, if we had a universal, market-driven price on carbon.

[Ghost Of Milton Friedman Materializes In Chicago, Endorses A Price On Carbon]

California’s Cap-and-Trade: How it Works

In California’s system, the CARB puts an inviolable cap on each sector, clearly defining which activities are covered and which aren’t. Then it lowers the cap by 3% per year through 2020. Companies operating under the cap aren’t allowed to emit unless they get allowances, which the government either distributes or sells quarterly, using the proceeds to support environmental activities or poor communities. A company that slashes emissions can sell allowances to a competitor, and a company that fails to slash can either buy allowances from other companies or buy offsets, which are similar to allowances, but different.

While allowances are issued by the government, offsets are created by green entrepreneurs who proactively save endangered forest or invest in equipment to suck the methane out of dairy barns or restructure rice paddies so they don’t get waterlogged. They take on massive risk in the process, and they go through a rigorous validation period to make sure their projects are well-designed, with verification inspections coming after that to make sure they’re doing what they said they’d do. Then, after all this, they face market risk, and they’re on the hook for “reversals” if something goes wrong.

[More About California’s Rice Offsets]

A debacle like Porter Ranch should be an automatic windfall for people who’ve busted their butts to build offset projects, and a boon to green projects across the state.

Escaped Fugitives

CARB isn’t the only regulator to give fugitives a break. Plenty of the world’s 50 or so other emerging cap-and-trade systems do the same – and for reasons that kind of make sense, but also kind of don’t.

“Fugitives are too difficult to quantify with accuracy to be subject to a carbon price,” says Rajinder Sahota, who heads the CARB team that evaluates industrial activities. “We can’t set caps for unpredictable and hard-to-quantify fugitive emissions,” she adds. “As such, the cap-and-trade program covers predictable and quantifiable emissions from combustion and process sources.”

Basically, fugitives are always leaking, in little bits here and there, and no one really knows how many there are, so you can’t put a price on them. What’s more, cap-and-trade isn’t designed to punish outliers who run amok, but rather to prod the corporate herd towards adopting long-term emission-reduction strategies. Finally, if SoCal Gas were forced to offset this mess immediately, prices would surge, hitting the innocents as well as the guilty, and possibly derailing the fledgling cap-and-trade system. From that perspective, I can see why we’d overlook the occasional accidental discharge.

But energy companies are used to managing price risk, and this isn’t a little squeaker. It’s a rip-roaring, thunderous disaster – a bona fide blast of emissions that may be a direct result of the company’s own negligence, and it’s quite quantifiable, too, as the Environmental Defense Fund showed with this nifty little counter.

The Market Says: $70 Million Minimum, and Counting

Methane is roughly 84-times worse than carbon dioxide in the short (20-year) term, so EDF’s counter translates methane emission to carbon-dioxide equivalent (CO2e), which is the standard measure of greenhouse gases. As you can see, Porter Ranch has spewed about 7 million tons of CO2e to date, which translates into 7 million offsets. The latest Ecosystem Marketplace survey shows that California offsets are currently trading at about $10 each, SoCalGas should have to pump at least $70 million into projects that seal mines, restructure rice paddies, and store fermenting cow poop.

Under cap-and-trade, this would be automatic and indisputable – the absolute, undeniable, rock-bottom down payment on restitution. In fact, markets being what they are, the company might even have to pay a hefty and unintentionally punitive premium to get so many offsets so quickly, and that would by no means let them off the hook for the damages inflicted on those 2,300 families or anything else they may be liable for.

[Six Heads of State Call for Carbon Pricing]

Ultimately, we need a universal price on carbon – regardless of whether that carbon is discharged by accident or intent. In a global market, a single disaster like SoCal Gas’s wouldn’t hit the innocents that hard, but it would send a clear signal to other companies thinking of saving a few bucks on a safety valve or two: with a price on carbon, cheap is expensive.

Steve Zwick

I edit Ecosystem Marketplace, which is a news service focused on environmental finance. With this blog, I hope to offer coverage that is a bit lighter and more holistic than what we offer on EM.

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