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Pricing Carbon Pollution: A Historic Day in California

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Yesterday California held its first auction of permits for carbon emissions under its landmark cap-and-trade program. My colleague and fellow economist, Jasmin Ansar, has been on the ground in California working on this issue for years. Today I asked her to provide some expert insight into the latest developments.

The following commentary is from UCS Western States Climate Economist Jasmin Ansar:

California’s first carbon allowance auction

On November 14, California officially launched its cap-and-trade program by offering 23 million vintage 2013 allowances and 39.5 million 2015 vintage carbon allowances for sale. California’s cap-and-trade program has significant potential to limit statewide carbon emissions, which contribute to climate change, while providing new economic opportunities for California.

Fossil fuel industries and their allies have repeatedly tried to undermine the program and even filed a last-minute lawsuit to try to stall the auction. But the auction went ahead as planned. (See this early legal analysis which showed why the lawsuit was unlikely to prevail.) Results of the auction will be released on November 19.

The significance of the inaugural auction on November 14 is that for the first time polluters in the state will pay a price for their pollution damage. Preliminary indications are that the first set of allowances are likely to be priced about the floor price of $10 per metric ton, with prices rising later on by 2015 when allowances for the first compliance period (2013-2014) must be surrendered.

Under cap-and-trade, carbon polluters will be required to have a permit (or allowance) for each ton of CO2 they emit. Initially, the permits will be allocated for free in certain industries, based on polluters’ levels of production. In other industries, the permits will be allocated by auction, going to the highest bidders. In both cases, permits can be resold in a secondary market, which means they will end up being transferred from firms that reduce carbon emissions to those with higher costs of abatement. This trading feature is designed to achieve an overall reduction in emissions at the lowest possible cost, which will benefit the economy by keeping price impacts low.

Benefits to the economy and the environment

Allowance trading gives polluters financial incentives to reduce emissions in many ways: by improving energy efficiency, by using renewable energy, and by employing alternative production technologies. The system allows businesses to decide for themselves how to best meet their obligations, while rewarding businesses that reduce emissions. Indeed, the cap-and-trade system will be a catalyst for new investment opportunities that conserve environmental resources.

Though the proof will be in the pudding, just the anticipation of the cap-and-trade market has already resulted in California becoming a magnet for clean tech investment and venture capital, which has stimulated job growth and innovation in the state.

California’s cap-and-trade program will be the second largest in the world, just behind the European Union Emissions Trading Scheme. In addition, this program will yield residents of California significant public health benefits because lower emissions will improve local air quality. They will also benefit from cost savings as increased energy efficiency limits the price impacts of cap-and-trade.

Resistance by refineries

While the cap-and-trade system is expected to benefit most residents in California, there are industrial entities, like the oil and cement companies, who will be asked to pay more to cover their pollution costs. Fossil fuel industries such as Valero and Tesoro, who financed Proposition 23, which attempted to derail the landmark climate legislation, are continuing their efforts to undermine the program.

The oil companies in particular are arguing that all the allowances be given to them for free so that they face no pollution costs. UCS estimates that the value of this hand-out is over $2 billion and does not support this public donation especially given the recent record-high profits and poor emission reduction performance of the refineries.

Oil, gas, and coal companies do not want to pay for their burning of fossil fuels and are intent on undermining the cap-and-trade program. They would prefer to continue using the atmosphere as a free garbage dump. In addition, they are financially threatened by clean-energy products, renewable fuels, and energy efficient industries that may render their industry the outdated “horse and buggy” as compared to the new carbon-free technologies. So far, the responsible regulatory agency, the California Air Resources Board, has resisted efforts at political grandstanding by these fossil-fuel companies.

All eyes on California

California has long been the leader in the design of environmental policies. The state has an impressive record of leading the nation in new vehicle emission standards and energy efficiency standards.

The California cap-and-trade program continues this tradition and could be a model for other states and countries around the world. If, as expected, substantial environmental benefits accrue while the costs of clean energy come down, then California’s success may have a demonstration effect, causing carbon-reduction programs to sprout in other places. That would be truly historic.

Learn more about the auction, including a quote from Jasmin, in this NPR clip.

Posted in: Fossil Fuels, Global Warming Tags: , ,

About the author: Rachel Cleetus is an expert on the design and economic evaluation of climate and energy policies, as well as the costs of climate change. She holds a Ph.D. in economics. See Rachel's full bio.

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  • Duke Briscoe

    Unfortunately, goods being brought into California have an economic advantage since their production had no cap-and-trade fees. This will tend to hurt some California businesses – hopefully not too many. There can be some positive effects of the law too perhaps – greater efficiency, developing competitive green industries that can sell outside of California. The most important thing is to establish national and global regulations, which might make it easier to penalize trade from countries not complying to carbon emission targets.

    • http://www.ucsusa.org/news/experts/rachel-cleetus.html Rachel Cleetus

      Reply from Jasmin Ansar:

      Thanks Duke for your comment. Yes you are right that there is a risk that imports into California face a competitive advantage since they do not face a price on pollution. To address this challenge the regulators have given the industrial sector almost all their allowances for free in the first compliance period, 2013-2014, and a declining percentage for free in later compliance periods. This gives the large polluters time to adjust and invest in carbon reduction strategies so that they will not face higher carbon costs.

      I think you are right on target that the end goal is for there to be national and global regulations and the hope is that a successful California experience will jump start this process.

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