What is the cap-and-trade market for carbon credits?
The Cap-and-Trade Market for Carbon Credits is a carbon pricing program in California that covers the greenhouse gas emissions of over 700 businesses. The Air Resources Board sets a cap on GHG emissions for those businesses, which is reduced over time. So, each year, those businesses must either reduce their emissions, use “allowances” or buy “offsets” that reflect emission reductions beyond those required by law and recognized by ARB as actual emission reductions. The price of those offsets is generally set through a market auction system, and the proceeds of sales from the auction are used to fund GHG emission reduction actions and projects.
According to the California Air Resources Board the State implements three other credit-trading programs in addition to the economy-wide Cap-and-Trade Program. The Low Carbon Fuel Standard allows for trading of LCFS credits and requires a reduction in carbon intensity across transportation fuels consumed in California. The Renewables Portfolio Standard allows for trading of renewable energy credits and applies an increasing renewable power standard for each utility’s procurement of electricity consumed in California. In addition, the Zero-Emission Vehicle Program allows for trading of ZEV credits and applies an increasing fleet-wide efficiency standard.
While some argued that the cap and trade system and other California policies to reduce GHG emissions would harm the economy, according to the Bureau of Labor Statistics, “From January 2013 to December 2016, California added 1,334,625 jobs, which represents 7.9% growth, outpacing 6.2% job growth in in the rest of the U.S. in the same period.” According to the AEE Institute, “Advanced energy job growth within California from January 2013 to December 2016 [was also experienced, with] California [adding] 136,664 advanced energy jobs, which represents 33.2% growth, more than quadrupling the state’s total job growth of 7.9% in the same period.”
What are allowances?
As part of the cap-and-trade program, many businesses are provided “allowances” each year. According to the California Air Resources Board, “an allowance is a tradable permit to emit one metric ton of a carbon dioxide equivalent greenhouse gas emission. The total number of allowances provided by [the air resources board] each year [is] equivalent to the annual allowance budget specified in the regulation.” This has been a controversial element of the program. Some contend that these allowances have artificially reduced the price on carbon and slowed emission reductions. Others believe that the allowances have moderated the carbon price in a manner that makes the program economically viable. The issue continues to be debated.
How have businesses chosen to comply?
The cap-and-trade program remains controversial. It has had some success in reducing emissions and funding emission reduction projects and programs, but some contend that it has not reduced emissions fast enough or provided co-benefits of pollution reduction in communities located near industrial sites. The issue of allowances, as noted, continues to be contentious, with some arguing that the allowances should be restricted so that the cost of carbon can rise, thereby promoting more investment in emission reduction. For it’s part, the Air Resources Board continues to evaluate and revise the program.
Some argue that cap and trade for emissions reductions is just a minor teak to “business as usual.” Instead, substantial carbon taxes will be more effective. Cap-and-trade incentives will do little more than transform emissions regimes to free pollution permits, where powerful interest groups will be able to grab onto more permits. Cap-and-trade can be economically inefficient. Others argue that this is a good approach because of the guarantee of emissions reductions. It is also seen as pragmatic because a cap-and-trade approach does not require politicians to vote on carbon taxes.
- Original California China Climate Institute episode
- Greenbiz – Can California’s cap and trade address environmental justice?
- California Air Resources Board
- Cap-and-Trade Program
- More than a climate solution
- Current debates around allowance hoarding
- Cap and Trade Debate
Ethan: How does the Cap-and-Trade program for greenhouse gas emissions work? To find out, former California Governor Jerry Brown spoke with Mary Nichols, the former Chair of the California Air Resources Board, during a California China Climate Institute discussion about the state’s pioneering program.
Ms. Nichols: The goal was to set a cap the neighborhood has to live under, reduce that cap over time so it would get lower and lower, like a game of musical chairs. Take away allowances from people and force them to clean up, but give businesses the opportunity to choose out of comply. The board was able to tell 700 firms and then extend it to natural gas and gasoline fuels, a mandate that they would reduce their emissions by a certain amount of turns. And they would have to have enough allowances to cover their emissions.
Ethan: The state auctions off Cap-and-Trade allowances to these businesses, with the proceeds going to California residents to offset any increased cost of electricity and natural gas. The rest of the money goes toward reducing greenhouse gas emissions or improving water quality, expanding public transit, increasing access to renewable energy, and building efficient, affordable housing. This is Ethan Elkind of Climate Break, bringing you 90 seconds of climate solutions. For further information on the California Air Resources Board and Cap-and-Trade, and for more climate solutions, go to climatebreak.org, or wherever you get your podcast.