California Kicks Off Carbon Market
National Test Underway
When it comes to buying and selling carbon credits, California is about to kick off. But will the new cap-and-trade program just adopted there promote cutting edge investments or will it cost jobs?
Many businesses and some environmentalists have argued that forcing reductions in carbon emissions through a free market trading program will cause industry to move out-of-state and hurt poorer communities, respectively. But the California Air Resources Board has voted unanimously to enact such a cap-and-trade program that is expected to cover 85 percent of the state’s emission sources -- compelled by the argument that it will be healthier for both the economy and environment.
“To be successful over the long-term, this program is going to have to deliver demonstrable benefits for Californians -- benefits that we (not only) can see in terms of the environment and air quality, but also benefits that we can see in terms of economic development, job creation, cleaner energy and transportation infrastructure,” says Mary Nichols, chair of the California board.
Enacting the cap-and-trade provision is an extension of the 2006 state law that requires about 600 facilities there to reduce their carbon emissions to 1990 levels by 2020. That’s roughly a 25 percent cut. Next year, the state will begin auctioning off some of the credits, although it will give away 90 percent of them to get the trading scheme off the ground. By 2016, it will be in full force and is expected to be $10 billion market -- the biggest in North America.
A cap-and-trade system is one in which companies that emit fewer allowed emissions can earn credits. Those credits can be banked or sold to other entities that are unable to meet the requirements. As the ceilings come down, overall emissions then drop.
Some green groups say that progress will be made only in those communities that already have high-tech industries and that the dirtiest ones will get worse. They had sued and demanded that regulators re-think cap-and-trade to address their concerns. As a result, the air board revised an earlier plan but those same environmentalists are expected to refile their case.
To be sure, the rules could turn out to be devoid of real change. Critics say that they will end up costing consumers more and will subsequently drive out large employers that find the laws too expensive to comply.
Take the Los Angeles Department of Water and Power, which depends on coal-heavy Nevada and Utah to provide half of its electricity needs. The utility, which serves about 4 million households, has previously said that its overall costs could rise by $700 million a year under the law. That, in turn, would force the power company to buy credits from those businesses that can meet greenhouse gas limitations -- money that the utility says would otherwise be spent on expanding environmentally friendly programs.
“We need to be especially careful as we implement climate change policies that we do not inadvertently disrupt or imperil the critical supplies of transportation fuels that keep our economies growing and citizens moving,” adds Catherine Reheis-Boyd, president of the Western States Petroleum Association, in a statement. She goes on to say that California’s law will amount to billions in new taxes that will adversely affect the 1 million people employed by its members.
But the transformation is happening. To that end, if the effort is to be successful, the carbon credit markets must expand -- just like any trading mechanism.
In the Northeast, Regional Greenhouse Gas Initiative is already in place and is a mandatory program is to reduce carbon levels by 10 percent by 2018. Now, the Western Climate Initiative has gotten 11 states and Canadian provinces on board. The goal is to cut the level of greenhouse gas emissions by 15 percent from 2005 levels and before 2020.
“When you think about that at the scale of the California economy, you realize how much sense it makes to reduce our dependence on these fuels,” says Remy Garderet, economist for Energy Independence Now, which analyzed how a cap-trade system would impact California’s economy. That study concluded it would save consumers money by giving them viable fuel alternatives and acting as a hedge against higher oil and natural gas prices.
California’s quest should be construed as a work-in-progress. If its cap-and-trade system is to be national model, businesses must not be bullied but they must still get on board. Collaboration is critical and the state’s future depends on it.
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