With California Carbon Cap-and-Trade Program Launch, Experts Debate Economic Side Effects

Read the full arti­cle on SFP­P’s page here.  Full text below.

By Bar­bara Grady, SF Pub­lic Press — Novem­ber 15, 2012

At 10 a.m. Wednes­day, California’s poten­tial­ly rev­o­lu­tion­ary car­bon cap-and-trade pro­gram launched in a hum­drum fash­ion. Num­bers began appear­ing on a secure Web site acces­si­ble to the biggest oil explo­ration com­pa­nies, man­u­fac­tur­ers, util­i­ties, state reg­u­la­tors and inde­pen­dent mon­i­tors. No one out­side of this select group got to see its inner workings.

But the event marked a new phase in the state’s pio­neer­ing effort to halt cli­mate change: actu­al dol­lars trad­ed for per­mits to emit car­bon dioxide.

For the first time in the West­ern hemi­sphere, green­house gas became a commodity.

“Putting a price on car­bon, which cap and trade does, changes the ball­game,” said San Fran­cis­co ven­ture cap­i­tal­ist Nan­cy Pfund of DBL Part­ners, who invests in clean-tech start-up companies.

“Once you get a price, every­thing flows from there,” she said. “It gives indus­tries an eco­nom­ic incen­tive and to make a difference.”

It’s a prod for some com­pa­nies to cut emis­sions, and for oth­ers to inno­vate. “We feel that cap-and-trade imple­men­ta­tion is great news for Cal­i­for­nia and great news for entre­pre­neurs who are pur­su­ing reduced car­bon solu­tions for many industries.”

Some cli­mate sci­ence experts, such as Pro­fes­sor Dan Kam­men, co-direc­tor of the Berke­ley  Insti­tute of the Envi­ron­ment and found­ing direc­tor of the Renew­able and Appro­pri­ate  Ener­gy Lab­o­ra­to­ry at the Uni­ver­si­ty of Cal­i­for­nia, have been argu­ing that putting a price on car­bon through mar­ket-based pro­grams are essen­tial to ever tru­ly achieve green­house gas reductions.

California’s pro­gram is the first estab­lished in the Unit­ed States — despite years of talk in Wash­ing­ton — and the sec­ond in the world after the Euro­pean Union’s Emis­sions Trad­ing Scheme. While util­i­ties in the North­east U.S. have a sys­tem to trade per­mits among them, this is the first to include a full mar­ket­place of industries.

Some 600 refiner­ies, oil explo­ration com­pa­nies, man­u­fac­tur­ers, nat­ur­al gas com­pa­nies, food pro­cess­ing plants and even uni­ver­si­ties were eli­gi­ble to par­tic­i­pate in trad­ing, accord­ing to the Cal­i­for­nia Air Resources Board, which over­sees the pro­gram. They are enti­ties that emit more than 25,000 met­ric tons of car­bon into the air. Start­ing next year, they must must find a way to cut those emis­sions by rough­ly 10 per­cent. Alter­na­tive­ly, they can go into the auc­tion, which hap­pens quar­ter­ly, to buy per­mits to con­tin­ue emit­ting at their cur­rent levels.

The over­all goal of California’s land­mark 2006 Assem­bly Bill 32, the Glob­al Warm­ing Solu­tions Act, is to reduce the state’s green­house gas emis­sions to 1990 lev­els by 2020. Estab­lish­ing a cap-and-trade mar­ket for car­bon is one crit­i­cal step.

To ease Cal­i­for­nia into the process, the Air Resources Board gave out free allowances cov­er­ing 90 per­cent of the car­bon emis­sions of each enti­ty reg­u­lat­ed by the pro­gram — those emit­ting more than 25,000 met­ric tons.

Each allowance rep­re­sents per­mis­sion to emit one met­ric ton of car­bon diox­ide. Buy­ers in Wednesday’s auc­tion pre­sum­ably bought allowances to cov­er some or all of the remain­ing 10 per­cent of their emis­sions. Sell­ers were orga­ni­za­tions that low­ered their emis­sions more than required, so had allowances to sell. The Air Resources Board auc­tioned off 23 mil­lion per­mits good for the year 2013.

Offi­cials won’t reveal the mar­ket price that emerged dur­ing the three-hour trade or the num­ber of par­tic­i­pants until Mon­day, by which time an inde­pen­dent mon­i­tor will have ver­i­fied the auc­tion pur­chas­es. The per­mits had a floor price of $10 each.

The mar­ket pric­ing of car­bon has cre­at­ed con­tro­ver­sy. Some see it as a cost to busi­ness, but oth­ers, an oppor­tu­ni­ty. Sev­er­al busi­ness groups said they feared the new cost for emit­ting car­bon would dri­ve com­pa­nies out of Cal­i­for­nia and hurt the econ­o­my. The Cal­i­for­nia Cham­ber of Com­merce filed a law­suit chal­leng­ing the cap-and-trade pro­gram Tues­day, alleg­ing it impos­es an uncon­sti­tu­tion­al tax, hours before the auction’s sched­uled launch. But the Board pressed on.

Many close watch­ers of the cap-and-trade program’s devel­op­ment said it has con­tin­gency plans and flex­i­ble enforce­ment mech­a­nisms to pre­vent harm­ful eco­nom­ic side-effects.

UC Berkeley’s Pro­fes­sor Kam­men said in an inter­view Wednes­day, “The Cal­i­for­nia cap is — in a very inno­v­a­tive way — a cap over the whole econ­o­my, not just elec­tric­i­ty.” So if a com­pa­ny choos­es to leave Cal­i­for­nia to avoid hav­ing to cut emis­sions or pay for per­mits, it means “they leave the mar­ket. That does not make sense and like­ly won’t hap­pen.” Cal­i­for­nia, after all, is the ninth largest econ­o­my in the world.

He has been a major pro­po­nent of cap and trade. Address­ing Copen­hagen Cli­mate Con­gress, the 2009 inter­na­tion­al con­fer­ence, he urged coun­try rep­re­sen­ta­tive to pur­sue ten­ta­tive plans for cap and trade and oth­er mar­ket mech­a­nisms to price carbon.

“The crit­i­cal fea­ture here is get­ting on with these exper­i­ments,” he told the Con­gress in a video­taped and wide­ly viewed ses­sion. “Any price on car­bon is bet­ter than no price on carbon.”

Some clean-tech­nol­o­gy pro­po­nents say they expect a boon to the econ­o­my instead.

“I do expect over­all eco­nom­ic growth because we are talk­ing about grow­ing the indus­tries of the 21st cen­tu­ry,” said Clint Wilder, a part­ner in the CleanEdge mar­ket research firm and co-author of “Clean­Tech Nation: How the U.S. Can Lead in the New Glob­al Economy.”

“One of the big ben­e­fits, we think, of a suc­cess­ful cap-and-trade sys­tem will be a grow­ing clean-tech indus­try in Cal­i­for­nia,” he said.

The caveat, he said, is whether in fact the cap-and-trade auc­tion was suc­cess­ful, which no one will know at least until Mon­day. Beyond that, the eco­nom­ic impact will become clearer.

In the­o­ry, Wilder said, “com­pa­nies who are incen­tivized to cut their car­bon emis­sions will want to buy the prod­ucts and ser­vices of the clean tech indus­try to make that hap­pen.” He said he is opti­mistic that will come true.

Ven­ture cap­i­tal firms have put some $9 bil­lion into Cal­i­for­nia clean-tech com­pa­nies since AB32 passed, accord­ing to DBL Part­ners. The clean tech sec­tor has grown at a rate many times that of the state’s over­all economy.

But the word for now is watch and wait.

Pacif­ic Gas & Elec­tric was list­ed as an eli­gi­ble par­tic­i­pant in Wednesday’s auction.

“Putting a price on car­bon touch­es a lot of pieces of our econ­o­my,” said Brad Neff, PG&E’s cap-and-trade imple­men­ta­tion man­ag­er. He said the com­pa­ny regards estab­lish­ment of cap and trade “a pos­i­tive step forward.”

“We real­ize California’s pro­gram can be a mod­el dupli­cat­ed else­where,” he said. Nonethe­less, “We are a lit­tle nervous.”