Cap trade’s smooth start


The cli­mate change de­bate may seem mostly to be about science, but it’s re­ally driven by dol­lars and cents— what will it take to re­duce green­house gas emis­sions, and how­much will that cost? Of all U.S. states, Cal­i­for­nia has taken the most di­rect ap­proach to set­tling those ques­tions through a pi­o­neer­ing cap-and-trade pro­gram.

More than two years into the pro­gram— which aims to re­duce the state’s over­all green­house gas emis­sions to1990 lev­els by 2020— it’s work­ing very­well, but it­may not be do­ing as­much as its big­gest fans say.

“We think we do have a good story to tell,” says Mary D. Ni­chols, chair­woman of the Cal­i­for­nia Air Re­sources Board, which ad­min­is­ters cap-and­trade.

The pro­gram’s quar­terly auc­tions of emis­sions al­lowances have gone on largely with­out a hitch. The pro­gramhas fit in, aswas ex­pected, with other emis­sions re­duc­tion pro­grams im­ple­mented un­der AB32, the state’s land­mark green­house gas leg­is­la­tion, in­clud­ing man­dates for re­new­able-fuel sources for elec­tri­cal util­i­ties and emis­sions stan­dards for new­cars and trucks.

It has done so with­out a mea­sur­able drag on eco­nomic growth. The pro­gram gen­er­ated $969 mil­lion in rev­enue for the state through the end of 2014, and is ex­pected to gen­er­ate $2 bil­lion a year or more in the fu­ture. The money must be spent on ef­forts to re­duce car­bon emis­sions.

“What we’ve learned is that a cap-and-trade sys­tem will not kill the Cal­i­for­nia econ­omy,” says Stan­ford econ­o­mist Lawrence H. Goul­der, who ad­vised the ARB on the pro­gram’s de­sign. “The econ­omy has con­tin­ued to flour­ish.”

The state’s green­house gas emis­sions have de­clined since cap-and-trade was in­tro­duced in 2013, but “the jury’s re­ally out on whether we’ve seen a lot of re­duc­tions caused by cap-and­trade,” says James Bush­nell, an en­ergy econ­o­mist at UC Davis who fol­lows the pro­gram closely.

That’s im­por­tant, be­cause find­ing the right in­cen­tives for in­dus­tries and con­sumers to re­duce their car­bon foot­print may be the key to fight­ing cli­mate change. All the op­tions, in­clud­ing cap-and­trade, di­rect caps, and a car­bon tax, are con­tro­ver­sial, though some are more po­lit­i­cally palat­able

than oth­ers.

Cal­i­for­nia’s cap-and­trade ex­per­i­ment is be­ing wide­ly­watched be­cause it cov­ers the broad­est range of in­dus­tries of any such pro­gram in North Amer­ica in the largest state econ­omy in the re­gion. It’s also, as the Leg­isla­tive An­a­lyst’s Of­fice de­clared in 2012, “one of the most wide-rang­ing and com­plex reg­u­la­tory ef­forts in the his­tory of the state.” If cap-and-trade can work here, it could work any­where.

“Cal­i­for­nia has pro­vided a very good sig­nal to other states and the fed­eral gov­ern­ment that sig­nif­i­cant re­duc­tions can be achieved through a mar­ket-based sys­tem,” Goul­der says. One pos­i­tive as­pect of the state’s length­en­ing ex­pe­ri­ence is that it has “drained away some of the fear-mon­ger­ing” about cap-and-trade, says Sev­erin Boren­stein, an en­ergy ex­pert at UC Berke­ley’s Haas School of Busi­ness. For ex­am­ple, the state’s oil and gas in­dus­try, which last year un­suc­cess­fully lob­bied to de­fer the Jan. 1, 2015, dead­line for im­pos­ing cap-and-trade rules on gaso­line sup­pli­ers, pre­dicted that the reg­u­la­tion would drive up gas prices by16 to 76 cents per gal­lon.

Boren­stein and other ex­perts ac­cu­rately put the in­crease at closer to nine to 10 cents, and ar­gued that cap-and-trade would be mean­ing­less if the largest source of green­house gases, trans­porta­tion fuel, was left out of the pro­gram.

Tomeet1990 level goals, emis­sions must be cut by al­most16%— from507 mil­lion met­ric tons of car­bon diox­ide equiv­a­lent to 427 mil­lion. Ev­ery year, ARB hands out or auc­tions al­lowances cov­er­ing that year’s emis­sion cap, which is re­duced year by year as 2020 draws near. Fac­to­ries and other sources of green­house gases can buy the al­lowances they need or sell any they don’t need. ARB for bids spec­u­la­tors to hoard al­lowances— to avoid the sort of ma­nip­u­la­tion that fouled the state’s elec­tric­ity mar­ket dur­ing the dereg­u­la­tion era of 2000-01— and sets a floor price, which will rise slightly ev­ery year, to sig­nal that emis­sions have some real cost.

The goal is to prompt emit­ters to be­comem­ore ef­fi­cient users of en­ergy. But the pres­sure is more of a nudge than a cud­gel be­cause of fears of im­pos­ing emis­sions lim­its so tight or costs so high that busi­nesses would flee the state. “Although we were mov­ing for­ward ahead of oth­ers, we weren’t mov­ing so far ahead that it be­came desta­bi­liz­ing to cur­rent busi­nesses in Cal­i­for­nia,” Ni­chols ob­serves.

En­ergy ex­perts ex­pect the auc­tion price of al­lowances to stay close to the min­i­mum through 2020, largely be­cause the emis­sion caps have turned out to be higher than what the state’s cov­ered in­dus­tries are ac­tu­ally pro­duc­ing.

The state’s other emis­sions man­dates al­ready have done much to bring emis­sions down. An­other big fac­tor was the re­ces­sion: The state’s green­house gas emis­sions fell 4.4% from 2008 to 2009, track­ing the slow­down in eco­nomic ac­tiv­ity, and didn’t re­turn to pre-crash lev­els un­til 2012, ARB statis­tics show.

“Cur­rent emis­sions are be­low what we would have seen even with­out the pro­gram,” Bush­nell says. “Whenwe came out of the re­ces­sion, every­body was a bit more ef­fi­cient, and those ef­fi­cien­cies have per­sisted.” Auc­tion prices may begin to rise, how­ever, if the state en­acts more strin­gent tar­gets for 2020-30, as Gov. Brown ad­vo­cates.

Alarger ques­tion, Boren­stein says, is whether emis­sions reg­u­la­tions such as cap-and-trade do enough to drive tech­no­log­i­cal change. “Cal­i­for­nia pro­duces1% of world green­house gases,” he says, “so it’s not go­ing to solve the prob­lem on its own. Mak­ing a dif­fer­ence means de­vel­op­ing new tech­nolo­gies that can be used in the de­vel­op­ing world. If Cal­i­for­nia meets our green­house gas goals by tak­ing ex­pen­sive mea­sures no one else is will­ing to do, that’s not do­ing it in away that drives tech­nol­ogy for­ward.”

ARB’s Ni­chols main­tains that cap-and-trade is achiev­ing that goal merely by es­tab­lish­ing a pre­dictable bench­mark price for car­bon emis­sions. Even at a mod­est $12 per ton, she says, “that’s enough of a sig­nal for in­dus­tries tomake dra­matic in­vest­ments in clean en­ergy.”

But it’s also just one piece of a broad strat­egy to fight cli­mate change. By it­self, cap-and-trade doesn’t an­swer the one most im­por­tant ques­tion on cli­mate change: Just how­much are we will­ing to do to win the fight?

Christina House For The Times

THE CAP-AND-TRADE pro­gram is work­ing very well, but it may not be do­ing as­much as its big­gest fans say. Above is Valero’sWilm­ing­ton re­fin­ery.

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