Fighting Climate Change One State at a Time

How do you make this green?

Photographer: Norm Betts/Bloomberg

Ontario recently announced plans to address climate change. Canada's most populous province thus joins a trend: Where national governments fail to act, states and cities are stepping up. Is that a good thing? It depends. 

QuickTake Carbon Markets

Climate change is a global problem that will ultimately require coordinated international action. Well-designed plans on a smaller scale can make a difference, partly by setting an example for others to follow; Ontario's plan follows that of Quebec and 10 U.S. states. Badly designed programs, on the other hand, may fail at large expense and set the cause back.

Ontario and the others have chosen "cap and trade." The government sets a limit for how much carbon dioxide can be emitted each year. That emissions cap is then split into individual pieces, called allowances, which companies can buy and sell. The idea is to create a financial incentive to curb emissions and to develop technologies that help. If the allowances are auctioned rather than given away, the policy also raises revenue, which can be used to promote renewable energy or for other purposes.

Markets in emissions work better with many players, which is why cap-and-trade systems are most promising at the national level. And, regardless of scale, most of the plans attempted so far have not been notable successes. The impact of the European Union's decade-old system on pollution has been small, while the regional effort set up in 2009 by nine Northeast U.S. states has had a "negligible" effect on emissions.

The culprit isn't a flawed concept so much as lousy execution. Both plans set caps that were higher than actual emissions -- a gap that grew when the recession hit and economies contracted. The price of allowances fell, and with it the incentive to curb emissions. Both systems have since taken steps to lower their caps. 

California's model, started in 2013, is better. Emissions from facilities included in the program fell almost 4 percent during its first year, even as the economy grew. As of this year, the system will have generated almost $1 billion for projects to cut emissions further. The state's success, and failures elsewhere, underline three points that should have been obvious in the first place:

  1. Set the cap at or below current emissions -- and build in a mechanism to adjust it if needed.
  2. Include as many sources of emissions as possible. The Northeast states' cap-and-trade system failed not just because its cap didn't bind but also because it covered only the power sector, responsible for just 20 percent of the region's emissions. Quebec's program covers about 85 percent of the province's emissions.
  3. Auction the allowances, don't give them away. Then, use the proceeds intelligently. True, even free allowances have value, and that creates the required incentive. But companies feel it more keenly -- and respond more aggressively -- if they're required to buy them in the first place. Then, to maintain public support, use the money either for projects that clearly help to cut emissions, or give it back to voters in the form of tax cuts.

There's no question that even the best-designed cap-and-trade system will have trouble beating a straightforward carbon tax. That approach is more efficient, easier to administer, easier to scale and entirely transparent -- not to mention better at reducing emissions. Weak cap-and-trade programs are little more than posturing. Such meddling is worse than doing nothing, because it undermines support for effective climate policies.

Still, if Ontario shows that California's success can be replicated or improved upon, that helps. More states and provinces will join in. Who knows? At some point, Ottawa and Washington might even get the message.

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