Market Forces

First steps for the California carbon trading market

By Susanne Brooks / Bio / Published: December 14, 2010

Whoever said cap and trade is dead hasn’t been paying attention to the news in California.

Recently, the first trade of a greenhouse gas emissions permit in the Golden State took place, signaling the beginning of what experts project to be a robust carbon market—and the largest in the U.S. given the absence of a nation-wide policy (note that the Regional Greenhouse Gas Initiative (RGGI), the first mandatory market-based effort in the U.S. with 10 participating Northeastern states, applies to utilities, while California’s program will also apply to industry and in later years, transportation). The trade takes place hot on the heels of the defeat of Proposition 23 in the November elections.

Although the compliance market won’t launch until 2012, Barclays Bank and NRG Energy completed the first allowance trade: a forward contract which guarantees the delivery of allowances valid for use in the California market at the start of the program at a locked-in price (around $11-$11.50 according to Point Carbon). By helping provide certainty about the future, these types of trades allow firms to make smart business planning decisions, such as which energy technologies to invest in. Experts at Barclays as well as at San Francisco-based CantorCO2 expect that other early trades are soon to follow, as firms look for ways to reduce risk and start transitioning to a clean energy economy.

Ensuring the integrity of the carbon market…

State regulators have been able to provide sufficient certainty about how the market will be structured and the timeline for regulatory action to allow for this early launch of the California market. However, it will be important to nail down sooner rather than later the nitty-gritty specifics of how the market will be regulated in order to ensure that trading occurs in an efficient and transparent way (note that the California Air Resources Board (CARB) is currently accepting comments on a detailed rule proposal).

The financial crisis we just lived through should provide ample incentive for us to make sure to get the rules right and for ensuring tough enforcement and strong oversight — for example, by requiring all carbon trading to be done on registered exchanges, rather than over the counter. On that point, it’s worth noting that the recently passed Dodd-Frank Financial Reform legislation requires the Commodities Futures Trading Commission (CFTC) to lead an interagency study on how best to regulate the carbon market. (Carl Royal’s 2009 testimony from the House Energy & Commerce Committee hearing on the American Clean Energy and Security Act and our own fact sheet provide some more arguments).

The path forward for CA

California’s cap-and-trade program will cover the power and industrial sectors starting in 2012 and the transportation sector (including cars and fuels) beginning in 2015. Time and time again, California and other regional initiatives, like RGGI, continue to lead the nation on sensible energy and climate policy (and stay tuned for developments in the Western Climate Initiative (WCI) as well as New Mexico). Time for Washington to catch up.

Not green or brown, just good economics

By Gernot Wagner / Bio / Published: December 2, 2010

Lord Stern famously calls global warming “the biggest market failure the world has ever seen.” It would only be natural for any introductory economics textbook to prepare budding economists to address this problem.

You would think.

Yoram Bauman, otherwise known as the Stand-up Economist, put together a sobering report: Grading economics textbooks on climate change.

Only four of sixteen books received As.

The others are either out of date, outright wrong, or worse.

It’s frustrating that even the best texts seem to banish the biggest market failure into sidebars or special chapters toward the end. Sadly that’s the typical treatment of environmental issues in introductory economics classes: “First, let’s discuss all the reasons why the economy is doing just fine. Then, if there’s time at the end, we’ll cover some exceptions to those rules.”

Krugman and Wells’s text appears to be the only one that integrates climate considerations into a key chapter, one on “long-run economic growth.” That’s not entirely surprising, given Paul Krugman’s other writings on the topic, but it’s good to know it starts with the introductory text. It would be even better if other texts followed that lead.

(More takes: Mankiw and Env-Econ)

Also posted in Climate science / Leave a comment

Gung-ho about cap and trade

By Gernot Wagner / Bio / Published: November 17, 2010

“Why are you so gung-ho about cap and trade? Don’t you realize it’s a corporate takeover of the atmosphere?”

I’m paraphrasing here, but this was the gist of an audience question I got while moderating a panel on Getting Carbon Market Governance right from Day One at the International Anti-Corruption Conference on Friday. The rest of the discussion was a frank exchange of ideas on how to ensure a workable, transparent carbon market. More on that later. For now a quick response to this question because I think it gets to the heart of why we do what we do. Why are we so “gung-ho” about cap and trade?

We ought to be polluting less because it’s the right thing to do, not because someone else limits pollution and hands out allowances to companies. Well, yes. If everyone woke up tomorrow and decided that global warming pollution was bad and that we ought to stop dumping billions of tons a year into the atmosphere, far be it for me to stop them.

Things aren’t quite that easy. We clearly ought to be moving toward a more coherent climate ethic. One of our panelists, ethicist Don Brown, made exactly this point. The question is how to get there.

No volunteers, please

Volunteerism simply won’t do. Misguided collective action got us into this mess. Properly guiding collective action is the only way out. That means polluters ought to pay. Pollution must not.

There may be academic debates to be had on cap-and-trade versus carbon taxes, but fundamentally the best way in the real world is to put a firm limit on pollution. It worked for combating acid rain in the 1990s. A version of it works for combating overfishing. And the EU has shown that it works for carbon on a large scale.

Carbon markets around the globe

Global carbon markets operating, likely, and under consideration. Cap and trade might be “dead” in Washington at the moment, yet it is clearly alive and well and spanning the globe: from existing systems in the EU, the Northeastern US, Alberta in Canada, and New South Wales in Australia, likely systems in California, South Korea and Japan, to systems under discussion or in planning stages in Mexico, Chile, Brazil, and Russia—not to forget China, which will likely at least experiment with cap and trade as part of its 12th five-year plan, in place starting in 2011.

Good for the environment, good for business

Will there be business interests pulling for cap-and-trade? Hopefully. The task is to guide a $5 trillion-a-year fossil-fuel-based energy sector into a cleaner, leaner future. There better be—and there will be—plenty of money to be made in the greener economy.

Yet far from being a corporate takeover of the atmosphere, a well-designed carbon market is a way to make polluters pay for the costs they now shove off onto others by treating the atmosphere as a free dumpster.

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