In the aftermath of the California Air Resources Board’s historic vote to adopt the nation’s first-of-its kind program to cap global warming pollution across California’s economy, understandably there are questions about what the program will accomplish and how it will get us there. Below, I will attempt to clear up 10 common misconceptions about the program:
Q1: Isn’t cap-and-trade dead?
A: For the moment, the federal government has stalled in its attempts to create a market to reduce global warming pollution. However, California and other states are moving forward with a plethora of clean energy policies. In California, one of these policies, accounting for about 20% of our global warming pollution reductions under AB 32, is cap-and-trade. This policy works in concert with other policies such as a Renewable Portfolio Standard and Clean Cars and Clean Fuels standards to ensure we reduce our pollution in the most cost-effective way possible.
Q2: Why is California going it alone?
A: California is leading the nation to join the global clean energy economy, but we arecertainly not going it alone. Twenty-two other states are also on the road of creating a clean energy economy through policies similar to California’s. California’s program is also carefully designed to ensure it does not put businesses that are working to reduce their emissions at a competitive disadvantage relative to other jurisdictions.
Q3: How can California do anything to address a global problem?
A: By showing that smart clean energy policies work for both our environmental and economic health. Certainly, California’s pioneering efforts alone are not enough to turn the tide on global climate change. But California has shown time and again that the economy and the environment go hand in hand – examples of successful policies include reducing air pollution, dramatically improving the energy efficiency of buildings and appliances, and demanding cleaner cars and trucks. Many of these policies, once shown effective in California, were then adopted in some form at a federal level. California can again show that protecting our health and environment and growing the economy are complimentary goals, thus igniting action on a larger scale.
Q4: But in the meantime isn’t this going to kill jobs and hurt California’s already struggling economy?
A: Quite the opposite. Clean energy is the fastest growing sector of California’s economy, growing 10% since 2005. Clean energy policies like cap-and-trade send a steady signal to the market that California is the place to invest in innovative new businesses that bring jobs to the state. So far, that signal has been working: California annually attracts more clean-tech investment capital than the rest of North America combined and has brought in $11 billion since AB 32 passed in 2006, creating thousands of businesses and jobs in its wake. By placing a price on carbon, this newly adopted market will maintain California’s competitive advantage in the global push for clean energy.
Q5: Isn’t cap-and-trade a big boondoggle for Chevron? Why don’t we just regulate them instead?
A: Cap-and-trade is regulation. It is a market-based regulation, but it nonetheless requires reductions in pollution that we would not get otherwise. In fact, cap-and-trade ensures a hard cap or limit on pollution where other policies (such as intensity standards or a carbon tax) do not guarantee that hard limit. California’s cap-and-trade program allows for flexibility in determining how to reduce pollution in the most cost-effective manner; it does not allow for flexibility in whether to reduce pollution at all.
Q6: Isn’t cap-and-trade a big boondoggle for Goldman Sachs? How can we protect carbon markets from manipulation and fraud?
A. Done right, market-based pollution trading schemes have been remarkably successful in lowering aggregate pollution levels at least cost (such as the 20 year old trading program to combat acid rain under the federal Clean Air Act). California’s regulators have incorporated lessons learned from other programs and have taken careful precaution to guard against the risk of market manipulation and fraud in the secondary market for carbon allowances. Every entity that wishes to participate in allowance trading must first register with CARB, who will track every transaction (each compliance instrument will have a unique serial number). The rules expressly prohibit manipulative behavior and afford regulators wide latitude to revoke the registration status of any market participant who is in violation.
Q7: Why not give regulated entities more time to prepare?
A: AB 32 passed in 2006, six years before the cap is set to take effect in 2012. Regulated entities have had years to assess their pollution reduction options and prepare themselves. Even in 2012, the cap does not actually require any reductions that first year, offering facilities even more time to transition. The cap then declines at a modest 2-3% per year, providing emitters a slow but steady incentive to improve efficiency and reduce emissions. The sooner regulated entities start to invest in clean energy solutions the better.
Q8: Is California giving away all the carbon allowances for free?
A: No. California is giving away significant allowances to start with in the industrial sector, but is auctioning allowances in the electricity and transportation sectors, which together make up the bulk of the program (see the “allowance distribution breakdown” graph from my December 16th post). More importantly, regardless of the allowance distribution scheme, a cap-and-trade program creates incentives to reduce emissions below allowable levels by turning pollution reductions into a marketable asset. This will help drive technological innovation and energy efficiency to speed our transition to a clean energy economy.
Q9: Can utilities use auction revenue to subsidize electricity rates and mute the carbon price signal?
A: No. Electricity utilities are specifically prohibited from using allowances to simply reduce rates for their customers (contrary to some assertions). They are allowed to offer rebates on the fixed portion of customers’ bills, which will ensure low income utility customers do not experience any disproportionate impacts. Utilities are also required to use the money to invest in programs that will further the purposes of AB 32, such as energy efficiency programs that both reduce pollution and help families and business save money on their energy bills.
Q10: Why don’t we “cap and dividend” and use auction revenue to give everyone in California a check?
A: While everyone likes getting a check in the mail, what we really need to do is build our clean energy economy through smart investments that can overcome market barriers to energy efficiency and low carbon alternatives. Using auction revenue to make these smart investments will be reap greater, long-term rewards for all Californians. A booming clean energy economy will result in jobs and growth that will yield dividends far greater than a single check.