This article is a “Big Read”, that summarizes our analysts view on California’s Draft 2022 Scoping Update released a few weeks back. This article covers:

1. Importance of this current scoping plan process in the historical context
2. Important elements in the Draft Scoping Plan and what to watch out for, including our assessment on the impact on the carbon markets
3. Comparison between the scoping plan modeling and CaliforniaCarbon’s CarbonOutlook model
4. Exploring possible explanations for the gaps between our forecasts and the Scoping Plan outlook, and what it could mean for carbon markets

The Draft 2022 Scoping Plan Update is a 250+ page document from ARB and is part of a multi-year process that covers a lot of ground. As analysts who track this space closely, if we had to  to summarize it all in 5 bullets, this would be our take:

1. The authors provide both an upbeat outlook, and a pressing need to combat climate change, building on some key successes so far.
2. Existing mechanisms are likely to be strengthened as the stated ambition is higher. This has a bearing on existing carbon markets.
3. There is a large focus on the role of Natural Working Lands (NWL), which quantifies the carbon pools that reside in plants and soils. NWLs are projected to be a net source of emissions through 2045, but regular NWL management over the next two decades can increase carbon stocks from CARBs BAU, reducing the gap between emissions and sink. We suspect a lot of work will happen on this front through the rest of this decade.
4. California will come up with an accounting framework for carbon emissions that addresses the out-of-state inventory. This is meant to track benefits accruing from the State’s actions to other jurisdictions and to prevent double counting. This could potentially feed into cross border carbon adjustment mechanisms being explored in several jurisdictions. Whilst it only has a small mention in the document, we think it can play a significant role in future.
5. The decarbonization pathway chosen makes some important assumptions that need to be reviewed:
   • Hydrogen forms a backbone of several decarbonization initiatives, but its implementation timelines have to be examined in greater detail.
   • In transportation, there is a big assumption on the decrease in Vehicles Miles Traveled, which goes against the historical behavior of Californians.
   • Carbon Dioxide Removal has 3 components – Natural Working Lands, Bio-energy with Carbon Capture and Storage (BECCS), and Direct Air Capture (DAC). How soon these will be deployed at significant scale is uncertain, the latter two technologies especially.

We are organizing an in-depth view on the Draft Scoping Plan on 16th June. Join us at 10 am PT.

Importance of the current California Scoping Plan process

On 10^th May, the California Air Resources Board published the 2022 Draft Scoping Plan Update for public comment. The Scoping Plan Review is a landmark process that finally culminates in legislation which directs state action towards achieving the State’s emission reduction goals. The process can take over a year, and is conducted every five years.

The 2022 Scoping Plan review is particularly important because for the first time, the State of California begins to lay out an outlook for 20+ years, by identifying pathways to reach its carbon neutrality goal.

The Scoping Plan process identifies technologically feasible, cost-effective, and equity-focused path to achieve carbon neutrality. The Plan also takes into account its impact on California’s economy, which is projected to grow to $5.1 trillion by 2045 under a reference scenario, nearly $2 trillion more than 2021.

This was also the first time that the Scoping plan process quantified the emissions and sequestration capacities of natural working lands (NWLs). The Plan has received ongoing recommendations from the Environmental Justice Advisory Committee. In April 2022, the EJAC provided draft preliminary recommendations in advance of the draft 2022 Scoping Plan to help ensure that the scoping plan meaningfully addresses environmental justice.

Long-term or short-term?

The State of California has been a leader on climate action, and is also an economic powerhouse, across the States and globally. The current Scoping Plan is likely to be seen by policymakers in that context and that of the changing geo-political landscape. The Russian invasion of Ukraine has created ripple effects: creating a structural shift towards greater energy security, while also having a potential to destabilize the global economy. The latter is an important consideration, especially when seen in conjunction with rising global inflation and supply chain dislocation and disconnection continuing to handicap growth. While the Scoping Plan process takes a long term view, the context in which policymakers are operating is likely to influence the actions that will emerge from the process.

Key highlights from the Draft 2022 Scoping Plan Update

The Draft 2022 Scoping Plan Update explores multiple scenarios. All of them have the following in common:

• Drastic reduction in fossil fuel dependence, with some remaining in-state demand for fossil fuels in aviation, marine, and locomotives,  with some gas for buildings and industry
• Ambitious deployment of non-combustion technologies like ZEVs and heat pumps
• Rapid growth in production and distribution of clean energy
• Strong consumer adoption of clean technology and fuel options
• CO₂ removal of remaining emissions to achieve carbon neutrality

The proposed scenario (Alternative 3), which achieves carbon neutrality by 2045, makes the following key assumptions:

• Higher feasibility for implementation of rapid solar deployment rates, this currently stands at 2.7GW per annum. The proposed scenario has an annual build out rate of 7 GW per annum.
• Assumes 0M Mt of Carbon Dioxide Removal (CDR) until 2035, but thereafter sets an aggressive pace to build out clean energy and carbon removal infrastructure – the proposed scenario has a slower CDR deployment rate than other alternatives
• This scenario accounts for high air quality benefits and crucially the least slowing of the economy and job growth.
• Reduces gasoline use 91 percent in 2045 from 2022 levels, relying on both a growth of ZEVs (Zero Emission Vehicles) and a questionable reduction of VMT (vehicle miles traveled per capita)

Impact on the carbon market mechanisms

The Scoping Plan process also impacts the Cap-and-Trade program as it suggests actions to the legislature for non-cap and trade measures. The Plan outlines several direct measures to drive clean energy (renewable portfolio standard), improve the clean fuels program (LCFS), enhance building efficiency in commercial and residential sectors, among others. The introduction of strengthening of direct measures may be interpreted as a shifting of emphasis away from Cap-and-Trade being the flagship climate program, towards it playing a backstop role to ensure that targets are hit… Or this might just be reading too much into the Draft Scoping Plan.

The changes for the Cap-and-Trade program are yet to be known. To quote the Draft Scoping Plan: “CARB will use the modeling for the Final 2022 Scoping Plan to assess what, if any, changes are warranted to the Cap-and-Trade, or other, programs to ensure we are on track to achieve the 2030 target. Since the original adoption of the Cap-and-Trade regulation, the program has been amended eight times through a robust public process. Moreover, Environmental Protection Secretary Blumenfeld testified at a Senate hearing that CARB will report back to the Legislature by the end of 2023, giving a status of the allowance supply with any suggestions on legislative changes to ensure the number of allowances is appropriate to help the state achieve its 2030 target. Engaging in this process in 2023 will allow for the finalization of the Scoping Plan, inclusion of additional data points for the second year of operation of the AB 398-designed program (which only came into force in January 2021), and an opportunity to hold public workshops.”

In essence, the final impact on Cap and Trade will be known by 2023, and it may yet involve changes to the cap before the 2030 milestone – however unlikely.

As analysts, here is our present view on some of the key elements:

Comparison between the scoping plan modeling and CaliforniaCarbon’s CarbonOutlook model

Since 2013, CaliforniaCarbon.info has been modeling carbon emissions and carbon prices for the California-Quebec Cap-and-Trade  program. Here we present a comparison between our current outlook and 2 of the scenarios in the Scoping Plan. We have considered:

1. BAU (Business As Usual) scenario from the Draft 2022 Scoping Plan Update (blue in graphs below with BAU in the legend)
2. Alternative 3 which is the Preferred scenario from the Draft Plan (purple in graphs below with Alt3 in the legend)
3. Present Trajectory from our own modeling which is our high probability scenario (green in graphs below with CarbonOutlook in the legend)

(For more details on our models please review our analyst note and our InSight reports on the California-Quebec Cap-and-Trade program.)

Overall Energy-linked GHG emissions

Here we compare the emissions from sectors that are covered by the Cap and Trade and LCFS programs (which represent about 80% of the State’s emissions). This does not include non-energy GHGs such as enteric / manure emissions, HFCs, and emissions from organic waste.

Sector-wise comparison of energy-linked GHG emissions

Carbon Dioxide removal (CDR)

Our assumptions around carbon dioxide removal are clearly more conservative than those assumed in the plan.

Exploring possible explanations for gaps between our forecasts and the Scoping Plan outlook

We have been poring over the Draft Scoping Plan and the supporting documents. A few things stood out which require more reflection.

It takes some time to change emissions and the two large drivers of emissions in California are:

1. About 29 million vehicles plying the roads
2. About 13 million residential and commercial buildings that consume electricity and piped gas.

Both the above sources of emissions have high inertia and are slow to transform. The reason they are slow to transform is due to the time it takes to upgrade these asset stocks (vehicles or homes). For example, even if 100% vehicles sold from today were Electric Vehicles, it would take about 12 years (i.e. 2034) to get gasoline vehicles off the road. On the flip side, every new gasoline vehicle sold today will contribute to emissions on an average 12 years into the future.

Other sectors can be transformed more quickly given the right economic and policy interventions – as we’ve seen in renewable power in recent years, where new technology out-competes and actively displaces the old on purely economic terms.

Speed of reduction of transportation emissions is likely to be challenging

The rapid growth of EVs has been the great hope for reducing transportation emissions, and EVs now form about 10% of new vehicle sales in California. Even after factoring in a continued growth rate, our transportation emissions are higher than those assumed in the Scoping Plan. We see that a lot has to do with assumptions around consumer behavior and usage of vehicles.

As outlined below, the Scoping Plan’s cumulative Vehicles Miles Traveled across the economy seems to drop rather quickly in the coming few years and then plateaus. This is at odds with the historical behavior of Californians and also assumes lesser transportation needs as the economy grows.

Pace of building electrification is an important assumption

We noticed that the Draft Scoping Plan assumes a rapid rate of building electrification – moving the heating from Natural Gas to Electricity. The underlying assumptions are:

1. For new residential and commercial buildings, only electric appliances would be permitted beginning 2026 (residential) and 2029 (commercial)
2. For existing buildings, 80% of appliance sales are electric by 2030 and 100% of appliance sales are electric by 2035 for residential (and 2045 for commercial buildings)

Our analysts believe this will prove an uphill task and so have made more conservative assumptions here instead. Correspondingly, our expected use of Natural Gas is higher. This is also linked to the Scoping Plan requiring a rapid buildout for a supporting electricity infrastructure, commencing now. Our assumptions have a more muted growth for electricity infrastructure.

Moving from Technology Readiness to Commercial Readiness take 15+ years

The Draft Scoping Plan relies on Green Hydrogen and CDR technologies as important parts of the solution. As has been well-observed in other domains,  it takes at least 15 years from the time technologies prove themselves in the field, to the time that they start to have wide scale adoption. This has been true for products ranging from cell-phones, to solar, to EVs, to the Internet, and so on. For Hydrogen to become an important component for HDVs, or for CDRs to be taken up by firms by 2035, the solutions need to begin to be adopted today. We are a bit more bullish on CDR’s uptake than we are on hydrogen at the present moment. Hydrogen holds a lot of promise but requires a massive investment in infrastructure, which is not happening right at this moment to set us on a 15-year trajectory

To engage more

Read more about some of our related research pieces:

Analyst notes on our most recent assumptions

• CA-QC Emissions Forecast 2022 Outlook
• CA-QC  Price Forecast 2030 and Outlook for 2050
• CA-QC InSight Report
• CA LCFS Analyst note Outlook for 2030
• LCFS InSight covering North American Clean Fuel Standards and the Interplay
• WCI Offsets: 2030 Outlook for DEBs and Non-DEBs
• Carbon Capture Use and Storage in WCI Markets- Primer

We are also hosting a call for our members on June 16th to delve into further details.