Editorial Board

California Beats Northeast With New Cap-and-Trade Strategy: View

One of the main complaints about the first cap-and-trade regime for greenhouse-gas emissions in the U.S. was well answered in a study released this week.

Critics had argued that the Regional Greenhouse Gas Initiative -- which links New York, Connecticut and eight other Northeastern states -- would increase energy costs for consumers. Based on its first three years, RGGI (pronounced Reggie) will actually do the opposite, producing $1.3 billion in consumer savings over the next decade, according to the study by the Analysis Group, an economic consulting firm. That’s because most participating states are investing a significant portion of their proceeds from carbon-allowance sales in energy-efficiency programs that reduce consumer bills.

The study, however, didn’t explore the bigger question about RGGI: Does it actually cut greenhouse-gas emissions, which are accelerating global warming? After all, that’s what the initiative was created to do.

We know that emissions have declined since RGGI was set up, but that may be only because economic activity has slowed. The program itself may have had no effect, because its emissions caps are set so high. Complying with them takes very little effort.

Fortunately, the U.S. will soon have a second shot at getting cap-and-trade right. Next month, California’s Office of Administrative Law is expected to give final approval to that state’s cap-and-trade plan, which is one of the most ambitious climate-change programs anywhere.

Under California’s program, utilities, big industrial facilities and fuel distributors will be required to ratchet down their carbon emissions starting in 2013 so that by 2020, collectively, they will have returned to 1990 levels.

Credits or Offsets

Individual plants will get allowances -- first for free, later at a price -- permitting them to emit only a portion of their current emissions: 90 percent in 2013, then less in later years. If they don’t achieve the prescribed reductions, they can buy unused credits from other polluters that manage to reduce their carbon emissions by more than what’s required. Or, they can purchase so-called offset credits. These are generated by projects that lower emissions from sources not subject to the cap -- for example, “digesters” on dairy farms that reduce methane emissions.

California appears to have designed a robust regime, judging by the price of allowances on CME Group Inc.’s Green Exchange in New York. For a 2013 permit, California carbon allowances trade at $18 per metric ton of carbon dioxide. That’s $3 more than the current price on emissions in the six-year-old European Union carbon market. California businesses clearly are eager to buy allowances to prepare to meet, or profit from, increasingly tough emissions rules.

This sets California’s system apart from RGGI. Because RGGI’s caps are so easy to meet, no serious market has emerged for carbon allowances in the Northeast. In a recent auction, they sold for only the mandated minimum of $1.89.

California’s program also offers an advantage over the EU’s in that it allows carbon emitters less recourse to offsets. These credits can be used to fulfill only 8 percent of a California facility’s compliance obligation, compared with 14 percent for an EU facility.

Every experiment has its downsides. One risk in California is that the program will increase the cost of doing business and living in the state, at least initially. However, the RGGI study suggests higher consumer costs are temporary. And, in any event, housecleaning is never free. Some businesses may leave California for less-regulated states, but these make up an insignificant part of California’s economy, according to a report by the nonpartisan Legislative Analyst’s Office, which provides research to the California Legislature.

Ditching the Permits

One worthwhile idea being discussed in environmental circles would be for the U.S. Environmental Protection Agency to even the playing field a bit by exempting states with vigorous cap-and-trade systems from certain carbon regulations. Of particular interest is a requirement that an estimated 15,500 new and existing facilities obtain Clean Air Act permits. This is largely a bureaucratic exercise, and the chance to avoid the permits would give some states an incentive to create -- and businesses a reason to embrace -- cap and trade.

Cap and trade has had a short and anguished history in the U.S. But the California plan is a marked improvement over those used in the Northeast and Europe, and it is a worthwhile effort to find a practical solution to climate change.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

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