That Warm Fuzzy Cap-And-Trade Feeling

Where it starts (or ends)

Cara asks if cap-and-trade skeptics like me still get excited at California’s Mini-Me version. The short answer (for me, at least) is yes. I’m all in favor of California rolling out its own version, and my hope has always been that the California Air Resources Board could develop a successful program that EPA could eventually build on, if the federal politics ever change. And a success in California could help change those federal politics by removing concerns about how these programs work in practice.

The primary difference with the two programs (state and federal) is obviously about scale, but it’s also institutional. First, California only has to regulate 360 sources (600 facilities), compared to 7400 sources (plus the two billion tons of offsets) in the proposed federal version. Although proportionally it may not make a huge difference, it does mean the state has a more manageable effort on its hands, which could make it harder for companies to get away with gaming and fraud. Second, the California effort has been devised by a regulatory agency with a more open and deliberative process, whereas the federal version came out of the sausage factory of Congress (for gruesome details, see Jonathan’s post on the New Yorker story covering the Kerry-Obama debacle).

The other reason why I like cap-and-trade in California is that it’s not the state’s only weapon against climate change. The program is part of a suite of measures proposed by CARB, along with the low carbon fuel standard, energy efficiency measures, land use programs, and other policies. I wish the Obama Administration had taken the same approach to tackling climate change and devised a strong transportation policy to go along with cap-and-trade, given how our transportation priorities have contributed so greatly to the problem. We’ll see what happens with the transportation bill in next year’s Congress.

But I still have concerns about cap-and-trade in general. For example, setting the cap is critical, and it depends on accurate information about the greenhouse gases currently being emitted by the covered sources. But are the emissions data reliable enough in the first place? California has a mandatory reporting program for greenhouse gas emissions, but ensuring the accuracy of this data may be an impossible task. And with offsets, we’re plagued by the unavoidable doubt associated with this concept: how do we ever truly know if reductions are additional or would have happened anyway? In some instances, it may be impossible to tell, particularly when eligible offset sources may cover a vast geographical area and many different types.

So let’s see if the sky falls or not with cap-and-trade (perhaps a bad metaphor given the topic). If California can lead the country with green jobs, less pollution, more housing options, energy independence, and lower utility bills through improved efficiency, even climate deniers will have a challenge spinning that success. Although I’m sure they’ll try.

Reader Comments

8 Replies to “That Warm Fuzzy Cap-And-Trade Feeling”

  1. The photograph shows the source of billions of tons of atmospheric carbon dioxide that enters California from the Pacific Ocean. The total amount entering from the Pacific far exceeds all anthropogenic carbon emissions in California, and vastly overwhelms puny offsets from cap and trade. A brisk ocean breeze would replace all of carbon offsets in California in less than two minutes.

    Perhaps California should consider purchasing the defunct Chicago Climate Exchange and relocate the trading floor to Rio Linda. Then; “…California can lead the country with green jobs, less pollution, more housing options, energy independence, and lower utility bills through improved efficiency…” This is a beautiful thought but it is all rather silly.

  2. The other reason why I like cap-and-trade in California is that it’s not the state’s only weapon against climate change. The program is part of a suite of measures proposed by CARB, along with the low carbon fuel standard, energy efficiency measures, land use programs, and other policies.

    The problem is that cap-and-trade will, by design, neutralize the effect of any such complementary measures within capped sectors. It will also create a strong disincentive for individuals, businesses, and communities to further reduce emissions within capped sectors, because any such reductions would simply free up surplus emission allowances, resulting in greater emissions somewhere else.

  3. Many if not most of these complementary measures affect sources completely outside of the cap — such as homeowners, car and truck drivers, and real estate developers. CARB has done a good job, in my opinion, separating out the various programs and deriving good faith estimates as to the greenhouse gas reductions from each one. So I don’t see cap-and-trade as neutralizing them at all. Second, regulated sources under the cap should theoretically have the incentive to make surplus reductions for two reasons: 1) to sell unused allowances to other companies that have a harder time making reductions or 2) to stockpile for later use when they have to start surrendering allowances to comply with a tightening cap.

    While there may be “greater emissions elsewhere,” the overall total under the cap should decrease, assuming CARB has accurately accounted for the amount of pollution from these sources and tightens the cap as designed. In theory, cap-and-trade locks in a fixed amount of emissions from all regulated sources that decreases over time. How those emissions get divided among the regulated sources is determined by this government-created market. Yes, I’m skeptical, but I think it’s worth seeing if CARB can pull it off.

  4. 84% of California’s projected emission reductions from business-as-usual in 2020 come from capped sectors. Of the remaining 16% uncapped reductions, 12% come from High Global Warming Potential Gas Measures and 3% come from Sustainable Forests; so excluding those two categories, virtually all reductions are in capped sectors. (See Table 2 on page 17 of the Scoping Plan [large PDF].)

    What that means is that while California will likely achieve its emission reductions according to a mandated declining cap, it will not be possible for individuals, businesses, and local governments to achieve any further reductions by unilaterally reducing their own carbon footprint. For example, if you purchase a fuel-efficient hybrid vehicle, your reduced fuel consumption will leave fuel refineries with unneeded allowances, which can be used to increase emissions elsewhere. If gasoline is expensive you might be motivated to invest in a hybrid just to save on fuel costs, but the incentive to reduce emissions would be neutralized by emission trading. Any extra cost that you incur to further reduce your personal emissions will, in effect, merely subsidize the beneficiaries of the resulting surplus allowances without having any effect on total emissions.

    Similarly, the incentives for regulated sources will motivate the market to seek out the cheapest emission reductions, but will not motivate any additional reduction in aggregate emissions even if allowance prices are far lower — and the environmental cost of emissions far higher — than anyone could have ever imagined.

  5. You raise good points, although what you describe sounds like not a bad problem to have. To cite your example, if we really end up reducing fuel consumption enough to cause a decrease in oil refinery output, that would be a major achievement. My guess is refineries would still end up producing surplus fuel to ship to other markets, but perhaps not. And if we actually did make all the reductions called for in the cap, that too would be a major achievement, even if in the process we dampened efforts outside the cap to reduce emissions.

    But ultimately, I’m not persuaded that cap-and-trade will limit emission reduction efforts outside of the cap. Why? Because non-regulated sources will still have incentives to reduce emissions. Some of these incentives are statutory: CEQA requires an analysis of greenhouse gas emissions and mitigation where feasible (which strongly impacts local government planning efforts, among others); SB 375 has created a regional planning process to reduce VMT. But some are monetary: energy efficiency saves consumers money, hybrid and electric cars save gas, diminishing water supplies may force water conservation efforts, and subsidies and mandates for renewable energy production has driven down costs and begun to make these technologies cost-competitive with some fossil fuel generation.

    I understand your point that the energy savings will partially benefit capped sources, but CARB will have to account for these changed circumstances as it monitors enforcement and development of the program over the coming years. And ultimately, if we can actually achieve the AB 32 targets (and the 2050 targets), we will have made a substantial contribution to the global mitigation effort, regardless of where those reductions come from.

  6. Ethan – Suppose we actually do achieve the AB 32 targets and the 2050 targets, and that other states and nations adopt and achieve similar targets. And suppose the targets are achieved at very low cost (e.g. $1.86/ton, which is currently the going price for RGGI allowances), but the climate system nevertheless suffers catastrophic and irreversible collapse. Would you then consider the policy to have been a success or a failure?

  7. I suppose this is your ultimate point: that the AB 32 targets may not be enough to avert a climate catastrophe and that we need to encourage even greater reductions. My understanding is that the targets are based on scientific evidence about the kind of reductions that are needed to avert such a scenario. So achieving them is our best guess about what we can feasibly do to mitigate. If the science changes, I hope our state government and CARB will adapt the AB 32 program accordingly (particularly since the 2050 target is by executive order and not statute).

    Ultimately, we are all relying on future economic and industrial innovation to help us escape this predicament. My hope is that AB 32 begins a process that spurs such innovation and helps us (and the global economy) transition away from fossil fuels and toward renewable clean fuels. We have to start somewhere, and AB 32 provides the tools to begin. Meeting these targets will simply be an indication that we’re making progress on this transition.

  8. The AB 32 targets were based on a 550 ppm target scenario (end of century atmospheric CO2 concentration; see 2006 Climate Action Team Report, pages 37-38).

    According to Hansen et al:
    Paleoclimate evidence and ongoing global changes imply that today’s CO2, about 385 ppm, is already too high to maintain the climate to which humanity, wildlife, and the rest of the biosphere are adapted. … We suggest an initial objective of reducing atmospheric CO2 to 350 ppm, with the target to be adjusted as scientific understanding and empirical evidence of climate effects accumulate.

    According to the paleoclimate record:
    The last time carbon dioxide levels were apparently as high as they are today — and were sustained at those levels — global temperatures were 5 to 10 degrees Fahrenheit higher than they are today, the sea level was approximately 75 to 120 feet higher than today, there was no permanent sea ice cap in the Arctic and very little ice on Antarctica and Greenland.

    So the question begs itself: Should the objective of regulatory climate policy be to achieve a predetermined emission target (or schedule of declining targets) at the lowest possible cost, according the the economic theory underlying cap-and-trade; or should it be to achieve the lowest possible emissions at acceptable cost?

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About Ethan

Ethan Elkind is the Director of the Climate Change and Business Program, with a joint appointment at UC Berkeley School of Law and UCLA School of Law. In this capacity, h…

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