It’s rare in these politically turbulent times for a government entity to make a unanimous decision, but that’s what happened as California’s Air Resources Board (ARB) adopted the most stringent cap-and-trade mandate in the United States in October 2011.

This cap-and-trade program is one of the measures being carried out under California’s Global Warming Solutions Act of 2006, also known as AB 32, which calls for the state to reduce carbon emissions to 1990 levels by 2020. The law does not require enactment of a cap-and-trade system but does require the state “to achieve the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions.” Requirements go into effect in 2012, starting with large industrial plants and electrical utilities, and enforcement begins in 2013. Moving toward 2020, the carbon cap will drop each year, resulting in what the ARB expects to be the alleviation of 273 million metric tons of carbon emissions.

How Does It Work?

Cap-and-trade associates heat-trapping pollution with carbon credit trading, creating a market to buy and sell carbon credits and offsets. However, at its core, the goal of cap-and-trade is not just to create a financial market but to provide strong incentives that reward sustainable, environmentally sound practices. California’s largest carbon emission sectors were assigned benchmarks and must limit emissions to 90 percent of the benchmark amount in the first year. As the Los Angeles Times explains, companies operating efficiently under the cap may sell their excess carbon allowance on the market; those with emissions above the benchmark must either reduce carbon output or purchase credits or offsets. Offsets essentially turn carbon “savings” into tradable equities, and companies reducing carbon emissions may store these independently verified credits and market them.

Thus, large emitters of greenhouse gases (GHGs) have a financial incentive to reduce their carbon footprint. Some industry advocates pushed for a more limited version of the emission guidelines, seeking to require emission ceilings through direct regulation, whereas others wanted to impose a carbon tax in lieu of the market-based trading system. However, the cap-and-trade dynamic offers a more comprehensive mechanism that not only mandates reduction among large polluters but also establishes energy efficiency as a tangible and marketable commodity.

ARB Chairwoman Mary Nichols said that the cap-and-trade program “sends the right policy signal to the market” and guarantees that California will continue to attract investment in clean technology.

“When the nation addresses the growing danger of climate change, as I believe it must and will,” Ms. Nichols stated, “California’s climate plan will serve as the model for a national program.”

However, Gary Stern, Director of Market Strategy and Resource Planning for Southern California Edison (SCE), one of the largest electric utilities in California, pointed to possible problems with a state-only cap-and-trade program:

SCE has long favored a national cap-and-trade as a cost-effective way to achieve GHG reduction targets. State-only programs, however well intentioned, are somewhat limited within the power sector. We have been supportive of ARB efforts to put a cap-and-trade program in place, and we do believe that market structure can lead to reasonable solutions to lower GHG reduction targets. In order for a state-only program be a good model for others to follow, it must result in GHG reductions at reasonable cost.

Although Mr. Stern is pleased with ARB’s willingness to collaborate with stakeholders on an effective program design, he expressed concerns about excessively high prices resulting from California’s untested cap-and-trade system, and he would like to see more protections in place to guard against this risk. Mr. Stern indicated that ARB shares his concerns and seems receptive to ongoing modifications to ensure the program’s success.

What Have Opponents Said?

In its path toward implementing the provisions of the California Environmental Quality Act (CEQA) in AB 32, the ARB faced legal challenges that threatened to thwart implementation of the cap-and-trade system. The San Francisco Superior Court, in its March 2011 ruling on Association of Irritated Residents, et al. v. California Air Resources Board, squelched further implementation of cap-and-trade until after ARB “comes into complete compliance with its obligations” under CEQA, specifically with respect to the need to evaluate possible alternatives fully.

Not surprisingly, the California Chamber of Commerce declared the 10 percent cut in allowances “arbitrary” and said ARB’s actions will drive up costs for consumers in California as businesses pass along an estimated US$ 2 billion in cap-and-trade costs.

Does Cap-and-Trade Lead to Green Policy?

Industry leaders are not the only ones challenging cap-and-trade as the best policy to effect real change in GHG emissions. Environmentalists worry that offering a financial “out” simply allows large polluters to avoid implementing serious sustainability measures. Environmental Leader published an excellent piece on this topic, elaborating on an Ecodesk study explaining that carbon-neutral banks are not necessarily more green. Ecodesk’s Sustainabililty & Finance Report points out that “companies purchasing carbon credits are ‘buying their way’ into a perception of sustainability, and that those banks claiming to be carbon neutral are no greener than their competitors.” Furthermore, some environmental justice groups argue that this market-based program allows large polluters to exploit poor neighborhoods simply by purchasing offsets rather than by reducing harmful output.

On a more hopeful note, the possibility remains that the market forces behind cap-and-trade will compel companies to implement more affirmative policies because the short-term solution of simply buying credits is not sustainable. Companies that are able to leverage this opportunity and sell credits will benefit from the stimulative effects of this environmental policy.

About the Author

Diane Bucka is a Freelance Business Writer and founder of Responsible Business Registry. Diane is a sustainability advocate and communications consultant with more than 15 years of writing, editing and marketing experience. Follow her on Twitter and Facebook; view her profile on LinkedIn.

Photograph: Exploding Star 1 by Carsten Huels, Luedenscheid, Germany.

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