Cap-and-Trade Market Quakes the First Time California Enforces Rules

Tuesday, November 18, 2014
(photo: Daniel Acker, Bloomberg)

Stakeholders in California’s cap-and-trade program, which compels local companies that pollute the air to invest in enterprises worldwide that reduce pollution, expressed distress and fretted about the future of the innovative marketplace after state officials voided some carbon offset credits for the first time.

The California Air Resources Board (CARB) approved a scaled-back proposal last week to void some of the credits generated by the nation’s largest incinerator of chlorofluorocarbons (known as Freon when sold by DuPont) in El Dorado, Arkansas. The incinerator is in Arkansas because California does not allow companies here to do what Clean Harbors Inc. does there, according to Dan Morain at the Sacramento Bee.

On May 13, the U.S. Environmental Protection Agency (EPA) ordered Clean Harbors to pay a $581,236 penalty for “improperly identifying and disposing of hazardous waste, improper storage of hazardous waste, and failure to comply with air emissions standards” in El Dorado. The penalty was levied for violations found during inspection in 2009 and 2011.

These were not accidents.

“As part of its operations, Clean Harbors generated hazardous waste that was improperly sold as a commercial substitute,” according to the EPA.

CARB preliminarily decided in October that it would void 231,154 offset credits generated by two projects associated with Clean Harbors, affecting some 20 California companies, but reduced that to 88,955. It is possible the locals could be on the hook for what could prove to be worthless pollution credits. A law firm representing some of the polluters originally put that figure at $43 million.  

California’s cap-and-trade program allows companies to purchase four different kinds of credits. They can invest in efforts to protect forests, combat methane emissions on Midwest and Eastern dairy farms, clean up methane emissions in coal mines and destroy greenhouse gases.

Writers for Ecosystem Marketplace (EM) reported that stakeholders they talked to “painted a picture of the market chaos created by what they called a subjective and error-prone investigation.” They were “shocked” by CARB’s audacity in invoking its authority to invalidate credits and said potential market participants were scared off by the very existence of the rules.

Clean Harbors announced days before Friday’s decision by CARB that it would no longer incinerate ozone-depleting substances (ODS) for California offset projects. The Arkansas plant is only one of seven commercial facilities destroying ODS, according to EM.  

 “There’s so much uncertainty in these markets,” Climate Trust program manager Peter Weisberg told EM. “It’s very difficult to convince investors that it’s worthy investing.” But he stopped short of saying the CARB decision was “market-destroying.”

A lot of people who care about clean air might not be all that distressed if the market were to fail. They would have preferred policies that directly address the problem by enforcing stricter pollution standards locally and shrink the state’s toxic footprint. But they lost to an argument that the marketplace would be more efficient and government could properly regulate it.  

–Ken Broder


To Learn More:

Despite Market Outcry, California Voids Some Carbon Offsets (by Gloria Gonzalez, Ecosystem Marketplace)

US: Clean Harbors Set to Exit California Carbon Market (by Dan X. McGraw, ICIS)

ARB Proceeds with Invalidation of Clean Harbors ODS Credits, but Exempts ECC Project (California Carbon)

California Cap-and-Trade Runs Afoul of Arkansas Pollution Ills (by Ken Broder, AllGov California)

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