Momentum building for California’s cap-and-trade program

Late last month, a story in Reuters’ Point Carbon ran under the headline, “California Governor Backs Carbon Market.” The state’s Air Resources Board recently completed a legal analysis comparing cap-and-trade with other alternatives. The board will vote on the analysis at its August 24 hearing and is widely expected to reaffirm cap-and-trade as the “preferred regulatory approach over a carbon tax or a mix of policies.” 

Other recent developments further bolster the case for cap-and-trade.  A study and article in the Energy Journal entitled, “Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?“, favorably compares cap-and-trade to a carbon tax.

The study conducted by UC-Merced and the University of New South Wales found that cap-and-trade will “trigger adoption of clean technologies at a considerably lower level of carbon prices” compared with a tax system. The authors used various models to test a scenario in which a small firm that owns a coal-fired plant considers investing in clean technology to provide electricity for its customers.

A savvy climate blogger who writes for Grist covered the study under the headline, “Cap-and-trade could spur faster cleantech investment than carbon tax.” He concludes that clean tech investment happens faster in the short term when you have a cap-and-trade system in place, in part because volatility in future permit prices will likely induce suppliers (such as the owner of the coal-fired power plant) to take early actions to hedge against carbon risks.

A second piece, “The case for cap-and-trade“, was published by the Property and Environment Research Center. It made the point that, “Reducing excessive pollution is a legitimate purpose of government, but the guiding principle should be to do so in the least obtrusive, least heavy-handed way possible.” The authors point out that market-based approaches have three advantages over command-and-control regulations:

  1. They create flexibility in who cuts pollution. Industrial facilities that find it easy to reduce emissions can save money by making extra cuts and selling unused pollution rights, while those facing steep abatement costs can pollute more.
  2. Market-based approaches create flexibility in how cuts are made. Plant managers, who know their business better than anybody in Washington, are given freedom to make the cuts however they choose. 
  3. Market-based approaches create incentives for entrepreneurs to find ways to reduce pollution more efficiently.

The article ends by saying that, “Whatever their feelings about applying it to carbon, conservatives and free market liberals alike can cheer the cap-and- trade approach to pollution as a victory for their ideals.”

California’s cap-and-trade system, which begins in 2013, applies many of these lessons and should serve as the model for innovative, market-based environmental policies in the future. California officials recently pushed back enforcement of the cap-and-trade by one year, giving the state more time to hone the regulation while keeping its environmental and economic goals (and resulting benefits) completely intact.

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