California LAO Report Highlights Key Benefits of Cap-and-Trade

The cap-and-trade report released late last week by California’s Legislative Analyst Office (LAO) confirms the state’s strategy to use cap-and-trade as a cost-effective way to reduce climate pollution under its landmark climate and clean energy law, AB 32.

This is another sign of good news for the California program, which will deliver significant environmental, economic and public health benefits to the state.

The 36-page report provides a valuable public service by describing the program’s key features and an accurate comparison of the differences between the market-based program, carbon taxes and other command-and-control approaches. 

As an advocate for cost-effective pollution reduction regulations that inspire innovation and reward over-compliance, EDF is encouraged to see the LAO agreeing that market mechanisms are generally a preferable way to cut pollution and more cost effective than other approaches.  EDF also supports the LAO’s finding that it will provide a backstop to other measures that California will use to reduce climate pollution to 1990 levels by 2020.

The LAO believes that California’s Air Resources Board (ARB) made reasonable choices when designing the program and that it will achieve its reduction targets. Specifically, it states:  

‘Our analysis indicates that, for the most part, the ARB has made a reasonable effort to balance these various policy trade-offs in the particular design of the cap-and-trade program it has adopted in its regulations. Based on our economic and policy analysis of the ARB’s package, for example, we believe the cap-and-trade program would likely function fairly effectively in terms of achieving the targeted level of GHG emissions reductions required under AB 32.’

While this recent analysis is welcome news for a program that is planned to start market operations in the second half of 2012, there is one point that needs to be corrected. In considering design tradeoffs related to program allowances, the report argues that by starting with a number of free allowances, ‘entities would emit more than if they had to pay for the allowances.’  We disagree. The reality of free allowances is that the opportunity cost will continue to inspire companies to cut pollution. If firms with free allowances pollute less than the amount they are allowed to, they can profit by selling allowances they don’t need. 

In addition to discussing the allowance structure, the report includes valuable details about the role that offsets will play.  Not only can offsets keep overall compliance costs in check for regulated businesses, they can deliver vast economic and environmental benefits for landowners, farmers and foresters who voluntarily participate by documenting emissions reductions and generating sellable credits.   Additionally, offsets provide critical incentives for reducing deforestation in tropical countries, which is the source of 15 percent of global climate pollution.

This new resource from the LAO could prove valuable as ARB puts the finishing touches on the program over the next year.  The agency’s positive views reflect one of our key points: cap-and-trade guarantees reductions, and at the lowest cost. Additionally, the report can inform the legislature as it decides how to invest allowance revenues to further drive our clean energy economy, create jobs and improve our ability to compete in the multi-billion dollar clean energy market.

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