State Ponders Spending Millions to Keep Polluters in Largely Unknown Cap-and-Trade Program

Thursday, August 02, 2012

California is afraid it might be about to spring a leak.

As the state approaches a launch of its innovative cap-and-trade program to reduce carbon-dioxide pollution, it is worrying that big companies will leave rather than pay for the environmental costs of their pollution. The state is setting up a market that allows polluters to buy and sell pollution permits in a market, and now is considering offering millions of dollars in free permits to certain industries to encourage their participation.

The cap-and-trade program was Governor Arnold Schwarzenegger’s signature achievement and was attained after heated discussion, heavy political maneuvering and lots of publicity. Yet, a survey by the Public Policy Institute of California shows that 57% of respondents never heard of it. Around 30% have “heard a little” and 12% have “heard a lot.”

After respondents are given a brief description of the program, 53% say they favor it and 36% are opposed.

The California Air Resources Board (CARB), which regulates the program set in motion last October under the direction of AB 32 greenhouse gas legislation, held a workshop in Sacramento on Monday where it talked about lending support to particularly vulnerable industries like cement production, oil refining and food processing.   

A discussion of “emission leakage” can be long, technical and full of historical data, but essentially revolves around offering inducements to companies to participate while avoiding perversion of the market with government money. The ensuing negotiations and deal making is at the heart of criticism by environmental groups that would have preferred a straight-forward carbon tax on polluters to a market-based solution.

The state begins auctioning pollution credits in November—the start of what is expected to be the world’s second-largest cap-and-trade program in the world—kicks the festivities off in earnest in January and plans to crank up the program to full force by 2016.

Around 600 companies are expected to swap pollution credits in a $10 billion market, capped by government-set limits. It is modeled after European and Australian ventures and is inspired by a national sulfur dioxide cap-and-trade program initiated in 1990 as part of the Clear Air Act, which is generally considered to be a success. The government cap has been reduced by half over time and benefits to costs are 5-1.

Although CARB is talking now about million-dollar breaks for certain industries, it probably wouldn’t be able to take any action before late 2013.

–Ken Broder      


To Learn More:

California Weighs Giving Away More CO2 Permits (by Rory Carroll, Reuters)

Majority of Californians Say They Know Nothing about Emissions Cap-and-Trade Program (by Dana Hull, San Jose Mercury News)

California a Step Closer to Carbon Cap and Trade (by Chris Clarke, KCET)

California's Carbon Caps Are Contentious but Coming (by Ken Silverstein, Forbes)

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