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Five Reasons You Should Care about California’s Cap-and-Trade Carbon Market

| November 14, 2012
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California will attempt to launch an honest-to-goodness carbon market on Wednesday, officially kicking off the state’s cap and trade program. It’s part of the landmark global warming bill, AB 32, signed back in 2006 by Gov. Arnold Schwarzenegger.

Craig Miller/KQED

This won’t be first cap-and-trade program in the world — Europe’s been trading carbon allowances for a half-dozen years or so — but it’s the first time it’s being tried on such a large scale in the U.S.

Cap-and-trade functions like a stock exchange for greenhouse gas emissions (we’ve broken it down with Monopoly money and poker chips in this week’s radio story). Businesses including oil refiners and manufacturers will have to buy permits for each ton of carbon they emit. It’s about as complex as the real stock market, with fun jargon like “allowance auction” and “additionality” and “CO2e.” In other words, just plain wonky.

So why should the average Californian pay attention? We asked a few experts to give us their take.

1. It could transform California’s economy

“I think it’s a turning point,” says Stanley Young of California’s Air Resources Board, the state agency implementing the policy. “It is the capstone of a suite of programs that we have put into motion since the passage of the bill in 2006.”

The goal of AB 32 is to cut California’s greenhouse gas emissions back to 1990 levels by 2020, a 30 percent reduction from business as usual. Young says to hit that goal, the state has taken on a matrix of programs including clean car rules, a low-carbon fuel standard and a big renewable energy goal.

Altogether, Young says these programs will make California a leader in clean energy technology.

“This is the final piece of the puzzle that will help California move towards a clean energy economy,” Young says.

2. It might hit your bank account, eventually

The point of a cap-and-trade market is to give businesses flexibility in how they cut their carbon emissions. Even with that flexibility, they’re facing an added cost that doesn’t exist today. “Even if we don’t feel the immediate impact, that doesn’t mean it’s not going to come home to roost in a few years,” says Dorothy Rothrock from the California Manufacturers and Technology Association.

The California Air Resources Board is taking steps to minimize the financial impact. Big utilities will get all their carbon permits for free, and other industries will get most of theirs for free initially. So, your utility bill won’t be going up next week (at least not because of cap-and-trade). But in 2015, when fuel providers have to start buying permits, the price of gas could rise.

“It’s not like [consumers] are suddenly going to see a big bill in their mailbox the next day, but the costs will be coming, and there won’t be a lot we can do to stop it,” Rothrock says.

3. If we’re going to regulate carbon emissions, this could be the most efficient way

Traditionally, environmental regulations are pretty firm. Industries get a limit on how much they can pollute and they have to stick to it. Cap-and-trade works a little bit differently. The overall emissions limit, or cap, is fixed — but where the cuts come from is flexible. Businesses that cut their emissions a lot can sell extra carbon permits in the market. They can also meet their obligation by buying carbon offsets toward tree-planting and other environmental projects.

“We want business to say, ‘do I do the reducing or do I pay someone else who can do it more cheaply?’” says Severin Borenstein, a UC Berkeley economist and an expert on energy markets. “I think that’s exactly the sort of approach we need so that we can reduce these pollutants at the least possible cost. That’s the whole goal here. We want to reduce the amount of pollution, in this case greenhouse gases, but we want to do it in a way that’s not too costly to the economy.”

That’s how it’s worked in previous cap-and-trade markets, he says. “We used early cap-and-trade markets to address acid rain and to reduce ozone. Both of those have been pretty successful. In both cases, the total coast of the reduction turned out to be much lower than the forecasts were.”

4. It could help communities already dealing with pollution

California will be auctioning off some of the carbon permits, or allowances, that businesses need – which could eventually raise billions of dollars. Earlier this year, the governor signed two bills, SB 535 and AB 1532, that direct where the money should be invested. Some of the auction proceeds must be spent on energy efficiency and renewable energy projects. Twenty-five percent of the revenue must benefit disadvantaged communities, either directly or indirectly.

“If done right, this program can get us on the path to greening up the state, investing hundreds of millions into disadvantaged areas, and building a strong clean energy economy,” says Vien Truong of The Greenlining Institute. “This program makes polluters accountable for the pollution they cause, so it has the potential to move us towards reducing air pollution and improving public health.”

5. Hey, it could actually help fight climate change

In the long run, California could face some very expensive climate change impacts like sea level rise, forest fires, and droughts. “Climate change is the most pressing problem of our generation and we need solutions,” says Emily Reyna of the Environmental Defense Fund.

Sure, California can’t single-handedly solve these problems, she says. California is the ninth largest economy in the world and accounts for, at most, roughly the same portion of the world’s overall greenhouse gas emissions. But the state’s cap-and-trade program will be the largest and most ambitious in the country, making California a proving ground for climate policy.

Even though climate change was scarcely mentioned during the presidential election, Reyna says the nation is watching how California does. “If it’s done right here in California, which I believe it will be, then it can be a real model for the rest of the country, the rest of the world,” says Reyna.

For more on California’s cap-and-trade program, listen to an hour-long discussion on KQED’s Forum:

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Category: Economics, Environment, Government

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About the Author ()

Lauren is a radio reporter covering environment, water, and energy for KQED Science. As part of her day job, she has scaled Sierra Nevada peaks, run from charging elephant seals, and desperately tried to get her sea legs - all in pursuit of good radio. Her work has appeared on Marketplace, Living on Earth, and NPR's Morning Edition and All Things Considered. You can find her on Twitter at @lesommer. Reach Lauren Sommer at lsommer@kqed.org.
  • http://www.michaelstavy.com Michael STAVY

    It is a commodity exchange, not a stock exchange, since AD 32 is making carbon emissions into a commodity. You might want to point out that the Kyoto Protocol, under which the EU-ETS started, expires 12/31/12, unless extended at COP 18 in Doha, Qatar. The EU to its credit has decided to continue the EU-ETS.

  • Mark Talmont

    Besides Sacramento Bee columnist Dan Walters, no one anywhere has written what an outrageous abuse of power this thing is. The Democrats created a corporate entity chartered in Delaware that operates in secret, to be governed by political appointees and exempted from all of California’s much-vaunted “open government” laws. They can contract with any entity under any terms and no one needs to know.
    The Cal ARB should have been eliminated after the MTBE fiasco which they followed up by hiring a liar with a faked resume and a PhD from a diploma mill in NYC (basically a mail drop). On the basis of this liar’s “study” they passed new diesel regulations that are raising food production costs. You can read about it (and apparently nowhere else) at KillCarb.org.