California's Cap-and-Trade Leadership

On Wednesday November 14, California held its first auction to sell carbon credits. For six years that state has been working on its cap-and-trade system, more than six years in the making. Finally California has imposed a limit on the amount of carbon emissions and this limit will be reduced over time so that by 2020 the state can cut emissions by 15 percent as compared to 1990 levels. Companies that exceed their limit are forced to buy credits from projects that cut greenhouse gas emissions. Almost all of the 23.1 million credits California has distributed to utilities and big industry for 2013 compliance have been free

Cap-and-trade puts market mechanisms to work on behalf of the environment. This approach to emissions reductions is a model for the rest of the nation. It was market driven forces that caused the build-up of climate change causing greenhouse gases. It therefore stands to reason that similar market mechanism can be brought to bear to reduce emissions and curtail warming.

There are valid concerns that energy intensive industries like refiners, cement makers and other large emitters will simply leave the state. However, these economic concerns pale in comparison to the extraordinary costs of continuing with business as ususal.

California’s carbon trading scheme is being met with political opposition, and legal threats from the state’s Chamber of Commerce, the petroleum industry and other energy intensive businesses. Bloomberg reports that futures contracts based on California carbon permits for 2013 dropped 40 cents to a record $12.25 a metric ton.

Although these issues are impacting carbon trading prices, they can be understood as the birth pains of a new system that will revolutionize the way we do business. Despite these obstacles, California is once again showing the rest of the nation the way forward.