California Cap and Trade Regulations: A Model for the Nation?

emissionsIt’s rare in these politically turbulent times for a government entity to make a unanimous decision, but that’s exactly what happened as California’s Air Resourced Board (ARB) adopted the nation’s first cap-and-trade program.  The program is one the measures being carried out under California’s Global Warming Solutions Act of 2006, also known as AB 32, which calls for the state to reduce carbon emissions to 1990 levels by 2020.  The law did not require enactment of cap-and-trade, but simply “to achieve the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions” to reach the stated reduction goal as stated in AB 32.  Requirements go into effect in 2012 and enforcement begins in 2013, starting with large industrial plants and electrical utilities.

How does it work?

Cap-and-trade essentially associates heat-trapping pollution with carbon credit trading, in essence creating a market to buy and sell carbon credits and offsets.  However, at its core, the goal of cap-and-trade is not just to create a financial market, but to provide strong incentives which reward sustainable, environmentally sound practices.  The state’s largest carbon emission sectors were assigned benchmarks, and must limit emissions to 90% of that amount in the first year.  As the LA Times explains, companies operating efficiently under the cap may sell their excess carbon allowance on the market; those with emissions above the benchmark must either reduce carbon output or purchase credits or offsets.  Offsets essentially turn carbon “savings” into tradable equities; companies reducing carbon emissions may store these independently verified credits and market them.

In this way, large emitters of GHG’s have a financial incentive to implement sustainable practices and reduce their carbon footprint.  Some industry advocates had pushed for a more limited version of the emission guidelines, seeking merely to require emission ceilings through direct regulation, or to impose a carbon tax in lieu of the market-based trading system.  However, the cap-and-trade dynamic offers a more comprehensive mechanism that serves not only to mandate reduction among large polluters, but also to anoint efficiency as a tangible and marketable commodity.

ARB Chairwoman Mary Nichols said the cap-and-trade program “sends the right policy signal to the market” and guarantees that California, the nation’s most populous state and which would be the world’s eighth largest economy if a separate country, will continue to attract investment in clean technology.

“When the nation addresses the growing danger of climate change, as I believe it must and will, California’s climate plan will serve as the model for a national program,” Nichols said.

What Have Opponents Said?

Indeed, in its path toward implementing the California Environmental Quality Act (CEQA) provisions in AB 32, the ARB faced legal challenges that threatened to thwart implementation of cap-and-trade rather than alternatives that would merely set emission ceilings and assess penalties.  The San Francisco Superior Court, in its March, 2011 ruling on Association of Irritated Residents, et.al v. California Air Resources Board, squelched further implementation of cap-and-trade until after ARB “comes into complete compliance with its obligations” under CEQA, specifically with respect to the need to fully evaluate possible alternatives.

Not surprisingly, the California Chamber of Commerce declared the 10 percent cut in alliances “arbitrary” and said ARB’s actions will drive up costs for consumers in California as business pass along the $2 billion the cap-and-trade plan is expected to generate.

Does Cap-and-Trade Lead to Green Policy?

Industry leaders are not the only ones challenging cap-and-trade as the best policy to affect real change in greenhouse gas emissions.  Environmentalists worry that offering a financial “out” simply allows large polluters to buy their way out of serious sustainability measures, rather than truly solving the GHG problem.  Environmental Leader published an excellent piece on this topic, elaborating on an Ecodesk study explaining that carbon-neutral banks are not necessarily more green.  The Ecodesk’s Sustainabililty & Finance Report points out that “companies purchasing carbon credits are ‘buying their way’ into a perception of sustainability, and that those banks claiming to be carbon neutral are no greener than their competitors.”  Furthermore, some environmental justice groups argue that this market-based program allows large polluters to exploit poor neighborhoods simply by purchasing offsets rather than reducing harmful output.

On a more hopeful note, the possibility remains that the market forces behind such a program will compel companies to seek more affirmative policies, as the short-term solution of simply buying credits is not sustainable.  Those companies smart enough to leverage the opportunity to sell credits benefit from the stimulative effects of environmental policy.  Will yours be one of them?