AUCKLAND, NZ – This week, I missed Wednesday.
Normally, the perils of crossing the International Date Line en route to field sites don’t bother me. After all, who really minds missing the middle of the working week?
But this time, Wednesday’s absence bothered me. That’s because two days ago, California officially opened its carbon cap and trade market with the first sale of emissions permits since the state passed landmark climate change legislation six years ago.
Given that the state of California does enough business to rank as the world’s 9th largest economy, and that its emissions trading system, once fully implemented, will be second only to the European Union’s, the eyes of the world – and, particularly, of those Washington policymakers willing to admit that climate change is an issue – are on the outcome.
Emissions cap-and-trade schemes represent a philosophical compromise between free market economics and rational regulation. On the one hand, a governmental body steps in by setting a “cap,” some limit to the total amount of emissions calibrated to limit environmental harm. But once this limit is set (and suitable penalties arranged to enforce it), the market takes over and the rules of supply and demand set the prices of emissions permits. As supply falls – say, as the government lowers emission limits – the price of each permit increases. This increasing cost drives technological innovation and emissions reduction. The most agile firms, which are able to reduce emissions below their permitted levels, can then sell off excess permits to other emitters.
The overall effect – elegantly demonstrated by reduction of sulfur dioxide emissions in this country just a few years ago – is to allow economics to drive environmental protection. As an added bonus, the funds collected from permit sales can be used either to compensate consumers for elevated downstream costs, or to fund additional emissions reductions research and programs. California plans to use the proceeds from last Wednesday, and subsequent permit sales, for a suite of as-yet unspecified programs intended to crank state emissions back down to 1990 levels by 2020.
Of course, the cap and trade plan hasn’t gone uncontested. Dedicated lobbying, threatened lawsuits, and some actually filed lawsuits attempted to stall Wednesday’s sale. And over the next few months – particularly when enforcement begins in 2013 – we’ll likely hear a fresh outcry from the major greenhouse gas emitters – primarily refineries, power and manufacturing plants, and transportation firms – required to comply with the regulations.
However, it’s worth noting that not all industry is opposed to emissions regulation. “Green” and “clean” tech companies benefit from a playing field leveled by putting a price on carbon dioxide emissions. And California has such tech companies in abundance.
California also has the size – both physical and economic – to make this program count. An emissions cap and trade program must be large enough to encompass a suite of market competitors within a region; otherwise, greenhouse gas emitters can move production elsewhere to avoid emissions regulations.
Such regulatory dodging has been the repeated concern of all governing bodies contemplating any form of pollution regulation. No one wants to be blamed for shipping jobs overseas, particularly given present-day economic struggles. But some things – like electricity generation – must happen on a relatively local scale. That’s why a coalition of nine East Coast states banded together to form the Regional Greenhouse Gas Initiative, which began selling emissions permits to power plants in 2008. And it’s also why, in 2007, the year after California’s landmark climate change legislation (the same legislation that produced Wednesday’s auction) was signed into law, California became a founding member of the Western Climate Initiative.
The WCI should have provided a platform for governments of the Western United States and Canada (with the notable exception of tar sands-happy Alberta) to coordinate development of market-based solutions for greenhouse gas emission reductions. Yet after years of delays, hesitation, and accusations of greenwashing, the Initiative has largely disintegrated.
Will California’s long-awaited cap and trade market opening stimulate new interest at the regional and national scale? Perhaps, given the recent, dramatic weather on the Eastern seaboard and President Obama’s nod to climate change in his victory speech, we might see a new flurry of activity. Still, it seems that, despite the long history of US technological leadership, we will be the followers when it comes to taking action on regulating carbon emissions.
Whichever way the pendulum swings, much will hinge on the results of California’s first auction, to be released on Monday. Or Tuesday, depending on your hemisphere.
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