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U.S. could have Cap & Trade by 2016 – if California succeeds.

Jim Pierobon's picture
Owner Pierobon & Partners LLC

Former Chief Energy Writer and Correspondent for the Houston Chronicle; SVP for Ogilvy Public Relations Worldwide; External communications chief for the American Council On Renewable Energy...

  • Member since 2007
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  • Nov 12, 2012

Think the U.S. could use tens of billions of dollars of brand new revenue to address its budget and debt challenges? And do you think newly re-elected President Obama might take a run at a bonafide climate strategy as part of his legacy by 2016?

The answer to the first question is easy. But answering “yes” to both might be made possible by the successful execution of the new market for carbon emissions allowances set to open formally January 1 in California. This Wednesday, California begins that process by executing a long-anticipated first-ever auction for carbon allowances.

If California’s cap-and-trade program is viewed as a net success, President Obama will have a lot more firepower to sell Congress on a program designed to cap greenhouse gas emissions and trade allowances all while raising sorely needed revenue.

So perhaps now we know why climate change and global warming never became an issue in this year’s presidential campaign. Not only was it a political hot potato. Rather, why bother? The marketplace that happens to be the world’s 8th or 9th largest economy on its own — California (it depends on who’s counting) — is about to stage a shining, or disastrous, example for the Obama Administration and every member of Congress to learn from.

Under the cap-and-trade scheme, California will distribute annual allowances to emit greenhouse gas to industrial companies such as power plants, refineries and cement factories that emit more than 25,000 metric tons of carbon dioxide. It will apply to about 300 industrial businesses operating 600 facilities throughout the state.

These businesses have been issued free credits worth 90% of their recent emissions. Now they must either cut their greenhouse gas production to that level or buy credits to make up the difference. Companies that have more credits than they need can sell them at the auction, and the state will sell additional credits as well.

The program was created by California’s Global Warming Solutions Act of 2006 which requires the state to cut greenhouse gas emissions 30 percent by 2020 and 80 percent by 2050. The first compliance period for the program begins Jan. 1.

The Act was designed to be “reasonable, well-thought-out program with rigorous reporting, monitoring and enforcement … while protecting California’s business and jobs,” said Matt Rodriquez, the head of the state’s Environmental Protection Agency to UPI.

Just in the first year, the cap and trade program is expected to generate $660 million-$3 billion in auction proceeds, according to UPI and InsideClimate News. By 2020, it could send $8 billion into state coffers each year. That’s real  money nobody, including diehard opposing Republicans, can easily dismiss.

Opponents of the system are quick to warn about what they say will be rising costs the law will impose on  California businesses. Some companies could make good on threats to move out of state. We’ll see.

Glendora, Calif., cement maker Cal Portland Co. told the Los Angeles Times that it projects a direct increase in costs of $2 million-$5 million annually.

“It’s a significant percentage of our costs,” Cal Portland spokesman Steve Regis told the Los Angeles Times, adding that the company also expects electricity costs to soar because of the new credits system. “Our concern is, we may no longer manufacture in California,” Regis warned. “We’d … bring it in from overseas or out of state.”

California’s energy and environmental policy leaders are proud of the state’s record in leading the nation to new auto emissions standards in the 1960s and efficiency standards for appliances in the 1970s. So the pressure is on the state’s Air Resources Board to get this right.

The risks for California are enormous. The lessons to be learned for the U.S. and perhaps the wrest of the world will no doubt seal, or unlock, the potential of cap-and-trade.

Opponents and supporters alike worry that the program could hurt the state’s fragile economy. Some are concerned that companies will find a way to outmaneuver the system, causing the state to fall short of its emission reduction targets.

“The worst possible thing to happen is if it fails,” said Robert N. Stavins, said Harvard economist in a interview with the Los Angeles Times.

Just three years ago, California’s plan was viewed as a trial run for a national carbon market that one day might tie into existing markets in Europe and elsewhere. President Obama’s first budget proposal included a cap-and-trade program to cut national greenhouse gas emissions 14 percent by 2020; the U.S. House of Representatives later passed an energy and climate bill that incorporated such a program.

But in 2010, political forces backed by the biggest emitters, oil and coal companies, blocked the plan in the U.S. Senate. In that year’s midterm elections, conservative Republicans disavowed their party’s role in creating similar programs; they continue to deride it as “cap and tax.”

California’s cap-and-trade system is much more comprehensive and ambitious than the only other greenhouse gas auction in the country: a 10-state Regional Greenhouse Gas Initiative (RGGI), begun in 2009 in the Northeast. It covers only electric power plants. A similar program in the Europe Union proved to be flawed when started in 2005 but has been substantially overhauled since then, albeit without promising results.

“But California is creating a model for a cap-and-trade that can work,” Stavins said. “Potentially, it could provide an example that other countries and larger organizations of countries could adopt, while we work out some of the kinks along the way.”

After last Tuesday’s re-election of Barack Obama, “cap-and-trade” doesn’t sound nearly as bad. A tall ‘mountain’ to climb? Yes, but no longer impossible, especially if the U.S. economy falls off ‘the dreaded ‘fiscal cliff.’

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Randy Voges's picture
Randy Voges on Nov 12, 2012

Given how competently California is run, it's hard to see what could go wrong with this.

Jim Pierobon's picture
Jim Pierobon on Nov 12, 2012


Please enlighten us on the many things that could go wrong with California's auction. And DO share if you see their plunge into cap-and-trade will revitalize ghosts of the state's electricity debacle in 1999-2000.

Either way, it should be an interesting ride.

Randy Voges's picture
Randy Voges on Nov 12, 2012


In light of California's inability to get their budget and pension issues under control along with its unquenchable thirst for higher taxes, I'm skeptical of just about anything California attempts.  They seem to be an excellent case study in bad government.  Of course, they do have a lot of competition.


Jessee McBroom's picture
Jessee McBroom on Nov 13, 2012

This California testbed will certainly prove an inyeresting aspect of the Cap and Trade System. Climate Change and GHG wise we will see ifCompanies make good on threats to move operations overseas or out of state. The economics vs TheResponsibility that plagues Industry and Corporate Fiduciary Resposibility to shareholders will all play out in this real world test program. The Economic and Environmental aspects and clashes will make for an interesting case study.

Jim Pierobon's picture
Jim Pierobon on Nov 15, 2012

Danny E:

The build up to this and the much-anticipated results of yesterday's auction have the potential to rival the state's electricity debacle. It appears to be me they should devote some of that money to repairing their own fiscal house, along with funding programs to improve energy efficiency.

Think if this were a carbon tax! The stakes could be much higher and the success, or failure, would energize, or quell respectively, the carbon tax movement. Incidentally, President Obama said at yesterday's press conference he won't propose a carbon tax. But he would consider it it someone else brought it the table.

We'll see.


James Hopf's picture
James Hopf on Nov 16, 2012

Note sure California is the best (or most representative) example with respect to CO2 emissions reduction, at least in the electric sector.

CA has no in-state coal generation (although they import coal-generated electricity) and they don't allow new nuclear power plants.  Thus, while they're the only ones requiring a reduction, two primary means of reducing emissions (coal to gas switching and nuclear) are unavailable to them.  All they really have, in the electric sector anyway, is replacing gas-fired generation with renewables.  Sounds like an expensive option to me (with the incremental costs being higher than usual due to the current low cost of gas).

This may lead to the history books saying that the policy was relatively expensive, when it would be much less so if applied in other states (where a large amount of old, dirty, inefficient coal capacity could be replaced with gas, at very little cost).  Note that most analyses conclude that replacing coal-fired power generation is the cheapest source of significant emissions reductions, by far.  Delivers a whole lot of public health benefit as well....

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