Cap and trade comes to state

Politicians keep a close eye on system that will create market for buying, selling carbon-emission permits

Come Wednesday, California will take its boldest, riskiest step yet to fight global warming, opening a market that for the first time will put a price on greenhouse gas emissions in the state.

The cap-and-trade system, six years in the making, will force owners of power plants and factories to buy and sell permits to spew carbon dioxide into the atmosphere. If it works, trimming emissions without trashing the state’s economy, it could serve as a model for the nation.

If it fails, the fallout could doom federal climate-change legislation for years to come.

Under cap and trade, regulators set a limit on the amount of greenhouse gases the state’s economy can produce, lowering the limit bit by bit, year by year. Companies buy and sell permits — called allowances — to release carbon dioxide and other heat-trapping gases. As the cap drops, allowance prices should rise, giving companies a power-

ful incentive to rein in emissions. The first allowance auction takes place Wednesday.

The idea has been used since the early 1990s to cut the sulfur dioxide emissions behind acid rain, doing so at a far lower cost than critics predicted. But sulfur is relatively easy to control, because most of it comes from power plants. Carbon dioxide, in contrast, comes from electrical plants, factories, fires, cars, planes — even human breath.

Attempts elsewhere

Still, other states and countries have tried to apply cap and trade to carbon. The European Union in 2005 created a greenhouse gas cap-and-trade system that now covers 30 countries, although experts remain divided over its success. And nine northeastern states have a carbon cap-and-trade market, but it covers only power plants.

In Washington, congressional Democrats almost pushed through legislation two years ago to implement cap and trade nationwide. But the proposal died in the Senate, killed by Republicans convinced that global warming is either overblown or a hoax. Congress has refused to touch the issue ever since.

Now public concern about climate change is rising again, fueled by Superstorm Sandy’s rampage through New York and New Jersey. A smoothly functioning carbon market in California could revive federal interest, particularly if the system draws in other states or links with Europe’s market.

“We’d have a truly global cap-and-trade system, and that would shine the light on Washington and Beijing and other capitals to do something,” said Terry Tamminen, former secretary of the California Environmental Protection Agency under Gov. Arnold Schwarzenegger. He helped draft the state’s 2006 global warming law that led to cap and trade.

For the system to be judged a success, it must cut carbon emissions without saddling California businesses and consumers with higher costs. Success is hardly guaranteed.

A previous attempt to create a complex market — radically reorganizing the state’s electricity market in the late 1990s — ended in disaster. Traders at Enron and other firms discovered ways to game the system, driving up energy costs, triggering blackouts and forcing thenGov. Gray Davis from office.

Some business groups have predicted similar catastrophes with cap and trade, saying the system will jack up prices for gasoline and electricity and send California companies fleeing to other states. Several business organizations, including the Western States Petroleum Association, have launched a petition drive calling on Gov. Jerry Brown to halt the auction before it begins. He has so far declined.

Dire forecasts

Should their dire forecasts prove right, cap and trade would become too toxic for any American politician to try again. Other possible ways to address global warming at a federal level, such as a carbon tax, could be jeopardized as well.

“If California goes belly-up, we can all point to it and say, ‘See, we told you so,’ ” said Myron Ebell, the director of energy policy at the Competitive Enterprise Institute think tank who helped marshal federal opposition to cap and trade. “But that’s not a very gratifying option.”

The politicians and government regulators who placed California on this path didn’t envision going it alone. The carbon market grew out of AB32, the state’s landmark global warming law. Signed in 2006 by Schwarzenegger, who made climate change one of his signature issues, the law calls for cutting California’s greenhouse gas levels back to 1990 levels by 2020. Schwarzenegger and the law’s other backers saw AB32 as a way to prod a reluctant federal government into action. As officials at the California Air Resources Board set about devising the carbon market’s mechanisms and rules, they hoped that other states — or the country as a whole — would join them.

“The argument made five years ago for the California system was, ‘Well, this is going to pressure Washington to move forward,’ and it wasn’t foolish for people to think that,” said Robert Stavins, director of Harvard University’s environmental economics program. “Obviously, that didn’t happen.”

It didn’t, because the politics of global warming changed.

Many conservatives had long harbored doubts about climatechange science, and President George W. Bush had adamantly refused any effort to slap hard limits on greenhouse gas emissions. But some of his fellow Republicans acknowledged the dangers of global warming and wanted to do something about it. During his 2008 bid for the presidency, Sen. John McCain advocated cap and trade, preferring it to heavy-handed government regulations on carbon.

GOP opposition

After McCain’s loss to Barack Obama, however, rejection of global warming science became a litmus test for Republican politicians. The party’s 2012 platform opposes cap and trade, which many conservatives now view as a tax, if not a government attempt to ration energy.

House Democrats narrowly passed a greenhouse gas capand-trade bill in 2009, written by Reps. Henry Waxman of Los Angeles and Edward Markey of Massachusetts. The bill fell apart in the Senate, undone by opposition from Republicans and from moderate Democrats worried about its potential economic effects.

Meanwhile, California’s potential partners in cap and trade kept dropping out. At one point in 2008, six other states and four Canadian provinces — working together as the Western Climate Initiative — tentatively agreed to create a carbon market with California. Now only Quebec is actively pursuing it.

“We have killed cap and trade,” Ebell said. He acknowledged, however, that interest at the federal level could be rekindled should California’s experiment succeed.

“If it works, I’ll be amazed — a lot of people will be amazed,” he said. “And I suppose that will give a new boost to the kind of policies that Henry Waxman and President Obama have been advocating.”

Tamminen argues that Republicans might be willing to reconsider their stance on global warming, as the party tries to broaden its appeal following lastweek’s stinging loss to Obama in his re-election bid.

“Climate change will be one of the things where they should go back to John McCain and Arnold Schwarzenegger and realize they should be a party of solutions, not the party of no,” he said. “As all politicians know, you can get out in front of a parade and pretend to lead it.”