What’s the matter with Arkansas?

Midwestern states have traditionally been reluctant to embrace cap and trade. Now it looks like they may well turn into some of the larger beneficiaries of the California cap-and-trade system.

The largest supplier of likely carbon offsets for the California program so far? Arkansas.

Midwestern suppliers

States of origin for CAR credits

Besides California and New York, numbers 2 and 3 on the list, none of the other states currently have cap-and-trade systems in place.

Michael Wara has a terrific blog post on this phenomenon and the ensuing politics of cap and trade. [Update: New graphs and data. The story doesn’t change. The graphs are prettier, though.]

Of the four types of offsets initially allowed in California (landfills, livestock, conservation forestry, and domestic ozone depleting substances), Midwestern states are the main beneficiaries.


How will that change the politics?

The Clean Development Mechanism (CDM), the UN-brokered international offsets system has perverse incentives. It motivates companies supplying large amounts of CDM credits (and receiving billions of dollars in return) to lobby their governments against instituting stricter domestic policies and having cap-and-trade systems on their own, lest they lose their chance of selling exactly those CDM credits. That’s one of the many reasons why the CDM system ought to be radically reformed.

What makes all the difference here is that CDM credits originate mainly from industrial and energy sectors that ought to be part of domestic cap-and-trade systems in the first place. California’s offsets are focused on sectors not covered by its own cap-and-trade system and most likely not covered directly in a US-wide emissions market.

A US-wide cap-and-trade system would only increase demand for these kinds of agricultural offsets and those from ozone depleting substances (ODS), making selling them even more attractive.

That by itself may not revolutionize federal politics, but at least the incentives are working in the right direction.

Wonk alert: A note on ODS

Offset categories
Michael Wara’s follow-up post zeros in on ozone depleting substances (ODS), which will likely play a major role in the overall offsets mix (light blue and orange in the graph on the right). They are also the reason why Arkansas comes out on top.

With ODS, though, Michael’s points are less clear. He argues to limit ODS offsets lest they create perverse incentives for future policies to tackle ODS through other concerted efforts.

I’m with Peter Miller on this one, who left a thoughtful reply on Michael’s post. The incentives for ODS offsets are generally very different from the CDM-style morass we are in and that Michael rightfully decries elsewhere. (Update: Michael received a number of other responses to his post, which he put up on this blog and says he will provide a response soon.)

ODS pose a serious climate problem. We need lots of incentives to destroy them before they escape into the atmosphere, while still guaranteeing proper checks and safeguards.

One such balance to strike is to allow ODS project developers to get the full value of current offsets without facing varying baselines year after year. Long-term policy certainty matters.

Of course, we must still do everything to do expand overall ODS policies, all with the goal of preventing as much global warming pollution as possible to escape into the atmosphere, and to do so as cheaply as feasible.

Many thanks to Tim O’Connor for some excellent pointers on this post.

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