As governments try to figure out the best way to get carbon polluters to invest in and produce cleaner energy, two scenarios continue to come forward: cap and trade vs. carbon tax.

A new study from UC Merced and the University of New South Wales in Australia suggests that a free and uninhibited cap-and-trade system is the best way to go. The authors argue such a system will “trigger adoption of clean technologies at a considerably lower level of carbon prices” as compared with a tax system.

In addition, the study concludes that the higher risk and volatility of an unhindered market “are likely to induce suppliers to take early action to hedge against carbon risks.”

The study appears in The Energy Journal.

Here’s how the authors came up with their conclusion: Yihsu Chen of UC Merced and Chung-Li Tseng of New South Wales created a scenario in which a small firm that owns a coal-fired power plant considers investing in a clean technology to provide electricity for its customers.

In this case, the authors chose a natural gas-fired power plant. The authors then asked, which scenario – a cap-and-trade or a tax system – would provide a better incentive to go forward with clean energy?

Using a variety of models and contingencies, the authors found that cap and trade provided the best incentive.

Cap and trade, or emissions trading, is a market-based system in which the government sets a limit, or cap, on the amount of pollutants an industry, manufacturer or other entity can emit.

The government then issues the company a set number of permits based on this cap. If the company reduces its emissions so it is below its cap, it can then trade the excess permits on a market with other companies that may need more permits, because they have exceeded their cap.

In the tax system, companies are taxed for a set amount of emissions.

In the case study the authors created, the cap-and-trade system allowed for less-expensive energy and an incentive to get into greener technology early.

How? Politicians and tax-system proponents have argued that a tax system provides predictability to the system. An investor would know the future costs of permits and not have to worry about risk. And that should provide confidence for industry to make long-term investments.

But according to the authors, it’s the risk that makes the cap-and-trade system so much more effective.

Consider plug-in hybrid cars, said Chen.

“You can run the car on gas if the electricity price is too high,” he said. “Or you can run the car on electricity if the gas price is too high. It is the flexibility or options value associated with this ‘dual system’ together, with uncertain permit prices, that makes firms willing to invest in clean technologies in a cap-and-trade system.”

In other words, he said, “firms can actually benefit from uncertain permit prices.”

The Climate Action Reserve, a national offsets program based in California, would not comment on the study.

California plans to have a cap-and-trade system in place by 2013.

This post originally appeared on California Watch, a project of the Center for Investigative Reporting.

(Photo: Craig Miller)

Blame the housing recession, not water restrictions. That’s the conclusion of a new report from the Oakland-based Pacific Institute, which scrutinizes the connection between cutbacks in farm water deliveries and Central Valley job losses during California’s recent three-year drought.

Impacts of the 2007-2009 California Drought: What Really Happened? is described by its authors as a “nine-month assessment of new data from California’s agricultural, energy, and environmental sectors.”

Its main finding, that “Farm job losses were largely unrelated to water constraints,” appears to be a direct refutation of claims by Congressman Devin Nunes (R-Fresno), and others, that regulatory and court-ordered restrictions on water deliveries have caused “massive unemployment” in the San Joaquin Valley.

On the contrary, the Pacific Institute study concludes that during the drought:

“California’s agricultural community proved flexible and resilient, generating agricultural revenues in 2007, 2008, and 2009 that were the highest on record. And agriculture-related occupations remained a stable portion of total jobs available in areas directly impacted by water supply restrictions.”

The authors say collapse of the home construction industry has been a far bigger culprit in Valley unemployment, citing figures from the Great Valley Center noting “a 2% gain in agriculture-related jobs between 2003 and 2009, but a 44% reduction in construction-related jobs over that same time.”

Part of the "Stairway of Power" on the Feather River. California's hydroelectric plants slowed down during the drought. (Photo: Craig Miller)

The 107-page report goes on to say that riparian ecosystems and the commercial and recreational salmon fisheries have suffered more drought-related damage than the farm economy. But the authors say they’re not trivializing economic suffering in rural California. The lead author of the report, Juliet Christian-Smith, stressed that while the report is a statewide picture, even areas that saw the most severe cutbacks, such as the west side of Fresno County, farm-related jobs “maintained their portion of total jobs” during the drought. “It’s very important to discover the real drivers of why this area has sustained long-term suffering and unemployment for decades, said Christian-Smith, “and think about how we’re going to make these systems more resilient in future droughts.”

One of the more obscure — but fascinating — findings was the drought’s impact on our electric bills. Christian-Smith says that as stream flow declined through the state’s hydroelectric plants, electric utilities were forced to substitute power from natural gas-fired plants, creating more carbon dioxide emissions and costing customers more than a billion dollars.