California Puts a Price on Carbon

Washington — California is holding its first carbon emissions permit auction November 14. The auction is a critical component of the state’s cap-and-trade program, a market-based initiative to reduce greenhouse gas emissions by creating incentives for companies to limit their pollution.

“California’s cap-and-trade program is the strongest and boldest move in the United States to protect public health and the environment from the clear and present danger of climate change,” said Fred Krupp, president of the Environmental Defense Fund, an environmental advocacy organization that helped sponsor and pass the bill.

As part of the 2006 Global Warming Solutions Act — the state’s broader policy to substantially reduce greenhouse gas emissions — the cap-and-trade program applies market mechanisms to reward companies for curtailing their pollution.

The state first establishes a limit, or “cap,” on the amount of greenhouse gas companies can emit. Currently, the limit applies to 350 companies, including electric utilities, manufacturers, oil refineries and other major emitters.

To stay within this limit, companies must either cut their emission levels or obtain “allowances,” a permit for every additional ton of greenhouse gas emitted. Companies can purchase these allowances at auction four times a year. Companies who stay below the cap can sell, or “trade,” their allowances to other companies for a profit.

Incorporating best practices from other cap-and-trade systems in the United States and Europe, California’s system provides free initial allowances to ease the transition, allows companies to store allowances for future use, and establishes an allowance reserve to keep the market price stable.

Each year, both the permissible level of emissions and the number of allowances drop to generate a gradual, but forceful, push toward substantially reduced emissions.

The cap-and-trade program is one of 70 measures included in the state’s 2006 law aimed at cutting California’s greenhouse emissions back to 1990 levels by 2020 — a 15 percent reduction.

But a substantial reduction in greenhouse gas emissions is not the program’s only benefit. The state expects to generate at least $1 billion from allowance auctions. The revenue must be invested in ways that further the law’s goals, however, such as in energy efficiency, natural resource conservation and renewable energy. A percentage of the proceeds must also benefit disadvantaged communities.

Not everyone is happy with the new program. The California Chamber of Commerce filed a lawsuit November 13 alleging the state had exceeded its authority by creating a revenue-generating program. Companies that operate California’s 13 oil refineries are also opposed to the program, saying it could lead to the closure of more than half of their facilities.

Given the controversy, many eyes are on California. As it implements what has been called the most ambitious effort to control climate change, the state is serving as a model for the country.

“California’s innovative policies can lead the way for the nationwide effort needed to curb emissions and reduce climate impacts across the globe,” Krupp said.