Photo: Señor Codo / Fisk
For those of us who don’t speak economics as a native language, California’s extensive cap and trade program tends to arouse one of three reactions: support, apathy and suspicion. We may nod our heads during conversation when the topic arises, but few outside of environmental economic circles grasp the totality of the program’s effect on commerce and the legal controversy brewing beneath its surface. There is dissent even among experts and legal minds.
Cap and trade monetizes pollution by, (a) requiring businesses to buy permits to pollute, and (b) capping the total number of emissions at a number that decreases annually. Each permit is worth one metric ton of emissions and can be obtained through auction or purchased from other businesses. The trade aspect provides that the market takes over where public auctions leave off, enabling companies that hit below their projections to sell their permits to businesses that could use the extra allowances.
At the center of the debate is California Governor Jerry Brown’s latest effort to extend the life of the program beyond its 2020 expiration date and 1990s emissions target. The Air Resources Board tasked with overseeing the program’s regulation unveiled a proposal on July 12 that seeks to extend that date to 2030 and reduce emissions to 40 percent below 1990’s level. This comes after a 2015 executive order to decrease output by 80 percent for 2050.
Despite the fact that cap and trade has been viable in California since 2013 – garnering hundreds of millions in revenue from the sale of permits and exceeding its emissions target – some moderate Democrats in the state Assembly question whether the practice is the panacea the governor has made it out to be.
Is Cap and Trade Essential to California’s Green Future?
California established cap and trade under Assembly Bill 32, the California Global Warming Solution Act of 2006. The bill was the first of its kind to specifically target climate change and aim to reduce emissions on such a grand scale.
But cap and trade is part and parcel of a larger initiative in California to drive down emissions. Efforts are underway to turn the governor’s previous executive orders into statutes in order to “provide additional security and durability,” says Erica Morehouse, senior attorney for the Environmental Defense Fund. Morehouse notes that California has managed to upset the national trend that correlates economic growth with increased emissions.
“California has actually been able to add jobs, grow the economy faster than the national average, while implementing the most ambitious climate action plan in the country,” she says. The cap and trade-bolstered solar energy industry, for example, remains one of the fastest growing in California.
Therein lies a key point of the debate. That the revenue from the sale of these permits is being used to fund everything from the controversial high-speed rail to solar subsidies and electric cars means that cap and trade has become politicized as more than a device for environmental progress. Some detractors question the program’s constitutional reach. A years-old lawsuit from the California Chamber of Commerce that has recently gained attention in appeals court accuses the program of acting as a tax law without the requisite two-thirds legislative vote.
Governor Brown has made ambitious climate change the cornerstone of his political agenda and cap and trade plays a major role in the advancement of that goal. His next step would link the program to Ontario, Canada, mirroring programs already in use in Quebec. The move, the proposal explains, “Expands opportunities for low-cost emissions reductions, thus improving the cost-effectiveness of the reductions achieved by the Program.”
In environmental speak, this suggests that the more connective tissue that exists between adjacent jurisdictions, the greater the reduction of emission worldwide. But the conclusion could also be drawn that further linking the program to the international arena would build its profile to the point of being indispensable. It is already invaluable to a number of organizations – the majority of them benefitting disadvantaged communities – that rely on auction proceeds for funding. If cap and trade were successfully struck down on legislative grounds, the projects it bolsters would eventually dissolve too – although the likelihood of that outcome is low, according to legal experts.
Disappointing Market Performance
Recently the carbon market has failed to produce the demand the public has come to expect. A permit auction in May that previously brought hundreds of millions in profits to California under-delivered, reaching only 10 percent of its goal.
The disappointing numbers point to less conspicuous sources. Businesses may have lost faith in the program’s viability or are holding out due to legislative concerns. A more optimistic take says the program is doing its job so effectively that companies have already reduced their emissions to the extent that that they’re satisfied with the number of permits they have.
“There’s been a couple forces that have come together to temporarily reduce demand for carbon allowances,” says Morehouse. “If California continues to send the strong signal that reductions are going to continue to happen beyond 2030, that will be temporary.”
A legislative vote in 2017 will determine the fate of cap and trade in California. More than just money hinges on the outcome of that vote. Unlikely defeat could mean the dissolution of the state’s environmental legacy, and Governor Brown’s, as we know it.