California to Create the Nation’s First-of-its-Kind Carbon Market

“The King is dead! Long live the King!”

I never really understood what that phrase meant – until now. Supporters of carbon markets witnessed the death of any potential for a climate bill in the US, at least until after the 2012 election. The Chicago Climate Exchange, a voluntary emissions exchange platform built as the model for a potential US carbon market, announced that it was shutting down its primary operations by the end of this year, mainly as a response to the fact that no meaningful climate legislation would be passed by Congress. The lifeline of a potential carbon market was, in essence, dead.

California has now ascended to the throne of market-based emissions exchange leadership. The California Air Resources Board (CARB) voted 9-1 yesterday to develop an exchange that will allow facilities in the industrial, electrical, transportation and natural gas sectors – the largest pollution emitters – to utilize a market based system to find the least costly way to reduce emissions. This program is being developed under AB32, California’s famous climate change mitigation initiative, which was saved from its own death by an overwhelming popular vote defeating Prop 23 in November. CARB used the political capital gained in that historic vote to implement the new market, which will operate as a cap-and-trade system.

A statewide limit will be set on sources responsible for 80 percent of California’s greenhouse gas emissions in the form of allowances that will decrease annually after the initiation period (2012-2014). The program will help to establish a price point intended to drive long-term investment in efficiencies and clean energy fuels and technology.

“This program is the capstone of our climate policy, and will accelerate California’s progress toward a clean energy economy,” said CARB Chairman Mary D. Nichols. “It rewards efficiency and provides companies with the greatest flexibility to find innovative solutions that drive green jobs, clean our environment, increase our energy security and ensure that California stands ready to compete in the booming global market for clean and renewable energy.”

Kristin Eberhard, the Legal Director of the Natural Resource Defense Council’s (NRDC) Western Energy and Climate Projects explains that this action is a “key milestone that will enable California to forge ahead with a clean energy economy,” and “an economically sound program that will send a steady market signal driving innovation in clean energy, reducing pollution and mitigating oil price shocks while creating jobs and promoting economic growth.” Eberhard describes the program in detail on her blog.

The key structural points of the program, as described by Eberhard are below:

“The program sets a limit on pollution, and requires facilities to submit to the Air Board one pollution allowance for every tonne of pollution they emit. There are a limited number of allowances available (similar to taxi medallions). Facilities are free to find the cheapest ways of reducing emissions and the Air Board only monitors whether facilities have enough allowances to match the pollution they emit, not how they reduced their emissions.

Every facility has three options for meeting pollution limits:

1) Reduce pollution by making facilities more efficient or finding alternative fuel sources

2) Get a pollution allowance either by getting it for free, buying it in an auction, or buying it from another facility that has an extra allowances

3) Buy an offset. An offset represents a pollution reduction from outside the program. A facility inside the program can invest in reductions elsewhere to offset their emissions.”

So, in essence, this program will improve upon the problems in the European cap-and-trade markets by setting a price floor of $10 per tonne, escalating 5 percent per year until it hits $15 in 2020, significantly higher than RGGI‘s floor of $2 per tonne. This should send a much clearer market signal towards innovation rather than avoidance.

Next week we will dig a little deeper into the ramifications of this historic decision, but for now we can rejoice that King Cali will continue to lead the way in the new energy economy. Congressional action may die, and the private voluntary market may collapse, but regulatory-driven market-based climate solutions live on in the very place that leads the world in innovation. Long Live the King!

Josh Gelfand is a staff writer living in San Francisco, though he was born and raised on the freeways of Los Angeles and spent many years in San Diego. He is a living model of what can be achieved when Californians bridge the north-south chasm and come together as one. He received his MBA in Sustainable Management from Presidio Graduate School and a BA in Journalism from the University of Wisconsin.

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