Why California's Cap And Trade Program Is A Big Deal

The state's program will be able to test the theories about whether cap-and-trade reduces pollution without destroying businesses. If it works, expect other states to quickly follow.

The U.S. may be lagging on carbon emissions reductions, but that hasn't stopped California from adopting the country's first cap and trade program--a set of regulations that will slash CO2 pollution to 1990 levels by 2020, all by charging the state's heaviest polluters for being dirty. Just as with its auto emissions standards, the state is taking its regulations to a level unmatched anywhere in the country. But if the new program works, it may not be long before others follow.

Starting in 2013, California's Air Resources Board (CARB) will give polluters an allowance of carbon credits (the amount of carbon they can emit) at the beginning of each year based on emissions reductions benchmarks. If a company doesn't use all of its credits, it can sell them--hence the "trade" part of cap and trade. And if a company knows in advance that it will emit too much carbon, it can buy credits or carbon offsets and keep polluting, just at a cost.

"This regulation is a safety net to ensure that our total CO2 emissions reduction targets are met. So if some of California's other regulations don't perform fully [i.e. fuel standards], the total amount of emissions still have to go down," explains Tim O'Connor, Director of the Environmental Defense Fund's California Climate and Energy Initiative.

Big polluters are, of course, concerned about the effect of the regulations. In a meeting last week, O'Connor observed many of the state's biggest petroleum refineries complaining about cap and trade. But, says, O'Connor, "This creates an incentive to find emissions reduction opportunities." And in any case, CARB has built-in transition assistance for major polluters (in the form of carbon credits).

In addition to cutting down on pollution, the cap and trade program may have the added benefit of boosting cleantech entrepreneurs, who will soon have a built-in market for their services. According to a recent paper in The Energy Journal, "a desirable climate change policy should provide polluting industries with strong incentives to take early preventive actions." Even if these industries don't take early action, they will be forced to in the coming decade.

Now that California officially has a cap and trade program, the rest of the country is taking notice. "This program will serve as a calling card for what can be done to reduce greenhouse gas emissions throughout a state's economy. States are not only looking at how it's going to be implemented, but they're looking at the fact that it was passed at all," says O'Connor. "That in and of itself should be the starting gun for other states to get serious about this kind of action."

[Image by Flickr user Bas Lammers]

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6 Comments

  • Steven Lange

    So they're going to "give polluters an allowance of carbon credits" which they can sell for money if they don't reach their allotted levels of pollution, and the buyers can "take up the slack" for the lower pollution from the first sources? Was this the "Ponzi legislation?"

    Why not distribute the carbon credits evenly to the populace and they can make money off industry polluting their environment? The people are going to be the ones paying higher prices when industry has to purchase unexpected carbon credits.

  • Nunzio Martin

    John I agree with on Friedman, I love his books and his ideas in general, and if the gas tax was used solely for those things I would agree with you but they are not they are used in part to fund other things, mainly mass transit. So how does that not distort cost?

  • John Howley

    What California is doing may sound "liberal" but, as Milton Friedman explained in his work on price theory, free markets do not work unless prices accurately reflect the true cost of the product.  When costs are externalized and prices do not reflect the true costs, investors and societies cannot make rational decisions.  That is why Friedman -- the Nobel Laureate who was a driving intellectual force behind Reagan's economic policies -- favored a gasoline tax to account for the externalized cost of pollution, wars to protect oils fields, etc.  California is simply ensuring that the cost of pollution is reflected in the price of electricity.  If the price of electricity goes up as a result, it will spur innovation and investments in alternatives.  That is how a truly free market works.  Not by externalizing the costs on the commons.

    John Howley 
    http://www.johnhowley.blogspot...

  • Nunzio Martin

    The concept of using a tax (the carbon tax) to try and solve the problem of global warming is out-dated. Taxes go back to the beginning of money, making the concept of taxation out-dated. The problem we have (global warming) is a problem that needs to be solved technically, not through taxation. Taxation is NEVER about solving problems – it has always been and always will be, about collecting money.