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Posted on November 20, 2012

California’s Cap-and-Trade Program: In Good Company

By Jonathan Marshall

California’s “cap and trade” auction last week made history as perhaps the most significant initiative in the country to harness markets to curb greenhouse gas emissions that contribute to global warming. But Californians aren’t alone in recognizing the flexibility and power of market incentives to promote a cleaner environment and more sustainable economy.

Last week the state sold 23.1 million permits that give holders the right to release one ton of carbon dioxide or other greenhouse gases into the atmosphere. By capping the total number of permits, and reducing their number over time, the California Air Resources Board (CARB) will put a firm cap on major emissions of greenhouse gases. And by creating a market price for the right to emit carbon, the system encourages companies and their customers to minimize the use of polluting fossil fuels and find more efficient ways of using energy.

‘An important milestone’

Hailing the auction as a success, CARB chair Mary Nichols called it “an important milestone for California as a leader in the global clean tech market. By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future. That means new jobs, cleaner water and air — and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient.”

That’s not just hot air. Cap and trade markets have been used successfully before, for example in the regulation of sulfur dioxide, a pollutant that causes acid rain and human health problems. Some years ago, in fact, it was an approach championed by conservatives as a market-based alternative to command-and-control environmental regulation. Programs like it are now being used by governments around the world to reduce greenhouse gases.

“The cap-and-trade approach is more than theory,” said Dallas Burtraw, a noted environmental economist at Resources for the Future in Washington, D.C.  “It has been put into practice many times, especially in the regulation of air pollution, and can be attributed with cost savings of billions of dollars compared to traditional regulatory approaches. Such cost savings are good for business and consumers; and costs savings are good for the environment because it means society can afford greater emissions reductions.”

From Australia to Canada

As an alternative market approach, many governments, from Australia to British Columbia, now levy carbon taxes as a key part of their climate policies. In British Columbia, a tax of $30 per metric ton of CO2 on combusted fossil fuels raises about $1.2 billion in annual revenue, which goes to lower personal and corporate taxes.

According to Tom Pedersen, executive director of the Pacific Institute for Climate Solutions at the University of Victoria, consumption of fossil fuels in British Columbia is falling relative to other Canadian provinces, while “our economy is growing at faster than the Canadian average and our clean tech sector is thriving, stimulated by the tax.”

Smart business leaders increasingly support such market-based approaches to curbing carbon emissions. PG&E was an early backer of AB32, the state law that established the framework for California’s cap-and-trade program.

Royal Dutch Shell, Unilever, and more than 100 other companies this week released a statement to governments around the world, declaring that “Putting a clear, transparent and unambiguous price on carbon emissions must be a core policy objective.” Establishing a “clear, stable, ambitious, and cost-effective policy framework,” they added, “is essential to underpin the investment needed to deliver substantial greenhouse gas emissions reductions by mid- century.”

That’s precisely the direction that California is headed. A lot of tough details still need to be ironed out. The transition won’t be easy or perfectly smooth. But California is helping lead the nation toward a healthier environment and economy over the rest of this century.

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