California's first cap-and-trade auction is a milestone in the fight against global warming. For the first time, a U.S. state is turning to the marketplace as a means of ratcheting back greenhouse gas emissions.
California has an ambitious goal: cutting back to to 1990 levels by the end of the decade. Sonoma County wants to cut further and faster — 25 percent below 1990 levels by 2015 — and progress is being made. Emissions in Sonoma County declined for the third year in a row in 2011, according to the Climate Protection Campaign.
But a single state cannot reverse the global effects of carbon pollution and climate change. Moreover, with an improving economy, demand will increase for energy, and people will drive more, making it harder to meet state and local goals.
Putting a price on greenhouse gases creates an incentive to meet the benchmarks. Cap-and-trade is a method of setting the price, using a market-based mechanism. If it works here, it could become a national model.
Under AB 32, a state law adopted in 2006, total allowable emissions will decline annually, returning to 1990 levels over the next eight years. Businesses that produce large amounts of carbon dioxide — oil refineries and power plants, for instance — have the option of reducing emissions or purchasing allowances at quarterly auctions.
Companies that reduce emissions can recoup costs by selling surplus allowances. An added dividend is the likely boost for Bay Area clean-tech companies that develop new methods for reducing emissions.
"By putting a price on carbon," state Air Resources Board Chairwoman Mary Nichols said, "we can break our unhealthy dependence on fossil fuels."
The cap-and-trade approach was used to reverse the effects of acid rain in Midwestern states that rely heavily on coal-burning power plants. One major difference with California's emissions program is that carbon allowances are being sold at auction rather than distributed without charge.
In its first quarterly auction, held last week, the air board offered 23.1 million emission permits for 2013, each good for one metric ton of carbon dioxide. All of them sold, and so did 5.58 million credits offered for 2015. Moreover, there were three times as many bidders as buyers, rebutting predictions that the auctions would be ignored.
The price set by the auction was $10.09 per metric ton, slightly more than the $10 floor set by regulators in advance. That's not nearly enough to meet a goal of raising $500 million a year for the state budget. But, as Nichols noted, the primary goal isn't to raise revenue but to reduce greenhouse gases at the lowest cost to producers. By that measure, the auction can be deemed a success.
State utility regulators have proposed that some of the revenue be set aside to help offset rising electricity costs due to the shift to cleaner energy sources. That would benefit residential and commercial utility customers, just as the ability to sell surplus allowances will help carbon producers.
California's program is the product of a Republican governor (Arnold Schwarzenegger) and a Democratic Legislature. Other states have shown interest but haven't started their own programs. Republicans in Washington have blocked a national cap-and-trade program. Yet if the Golden State's program succeeds, the rest of the country may ask why it can't enjoy the same dividends.