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California's carbon market: Will cap-and-trade work?

Nine months before California is set to finalize a trading system aimed at curbing greenhouse gas emissions, participants have the jitters.

Litigation threatens to delay the start of the multibillion-dollar program, and industry executives worry that its regulations will fall short of guaranteeing a smoothly operating market. Fear is growing that it could be susceptible to the fraud that has plagued a similar European system.

“It feels as though the sun has risen in the West,” Henry Derwent, head of the Geneva-based International Emissions Trading Assn., told traders, bankers, entrepreneurs and oil and utility executives in Los Angeles last week.

“But however tempting it may be … to celebrate getting out ahead of the rest of the United States,” he cautioned, California’s trading system must show “real momentum.... If the program goes poorly, if the regulations don’t allow for a functioning market, there may be little market for California to lead,” Derwent said.

Scientists say that carbon dioxide and other gases, mainly from fossil-fuel burning, are trapping heat in Earth’s atmosphere. leading to dangerous climate change, including rising sea levels, longer droughts, floods and melting glaciers.

In 2006, California passed the nation’s most comprehensive climate law, mandating a cut in carbon pollution to 1990 levels by 2020 — about 10% below today’s emissions. Although Congress balked at similar legislation in 2009, California has moved forward. Its plan to cap greenhouse gases at 600 industrial plants and allow companies to buy and sell emissions permits is modeled on Europe’s 6-year-old cap-and-trade system.

The 700 executives who signed up for the Navigating the American Carbon World conference last week included officials from Alcoa, Chevron, General Electric, Shell, Southern California Edison and other major companies. They were joined by financiers from Merrill Lynch, Deutsche Bank, Morgan Stanley, Barclay’s Capital and other large Wall Street firms.

Engineers and entrepreneurs manned booths and handed out shiny brochures to promote companies that verify carbon emissions, manage greenhouse gas data, broker credits and develop offset projects such as systems to control methane from farm manure or increase forest carbon sequestration.

The European system, which covers 12,000 companies in 30 nations, traded $123 billion in carbon allowances last year and is on target to slash emissions by 21% below 1990 levels over the next decade. But the market has been jolted by an estimated $6 billion in tax fraud schemes along with the recent cyber-theft of $50 million in carbon credits stored in the Czech Republic registry.

Today, “the eyes of the world rest upon this [California] market,” said Tom Lewis, chief executive of Green Exchange, a consortium of Goldman Sachs, Credit Suisse and other banks and brokers. Noting the “fraud and violations” in Europe, he added that California could be an example for the U.S., but “the criticism … will be abundant if we get it wrong.”

Carbon-intensive industries are also concerned that California might not provide enough ways for them to offset their emissions by purchasing credits. Although air officials have adopted rules for crediting U.S. forestry and livestock and the destruction of ozone-depleting chemicals projects, they have yet to approve rules for projects such as cutting methane from coal mines or rice farms.

California’s program would be North America’s biggest carbon market, three times larger than a utility-only system in 10 Northeastern states. By 2016, about $10 billion in carbon allowances are expected to be traded through the California market.

A court decision last month temporarily halted California’s cap-and-trade program after local environmental groups contended the California Air Resources Board failed to analyze alternatives to trading. The decision is expected to be appealed, but any delay in the January start date could throw a wrench into the financial planning of hundreds of companies.

“There’s some uncertainty around when this program is going to start and maybe if it will ever start,” said Graeme Martin, a Shell Energy official.

Air Resources Board Chairwoman Mary D. Nichols told the conference that “our ability to move forward is threatened as a result of litigation. We don’t know how it will turn out.... Some segments of the community, who define themselves as environmental justice groups, just hate cap-and-trade” because they believe it would not cut pollution in their communities.

“We have to be open to the possibility there could be other approaches and that we could achieve [carbon] reductions in a different way,” Nichols said. She added that Democratic Gov. Jerry Brown, who met with European Climate Commissioner Connie Hedegaard last week, “has the opportunity to put his mark on it.”

The trading program, seen as a way for industry to cut costs, was incorporated into the 2006 law by former Republican Gov. Arnold Schwarzenegger. Six other U.S. states that had joined with California in the Western Climate Initiative  in recent years have declined to participate in its trading program. Three Canadian provinces have indicated they will join.

“The way forward lies in individual regional, national and state systems over the world reaching out to each other over time,” Derwent said, given the failure of the United Nations to negotiate a new global climate treaty.

California’s success, he added, will determine the eventual fate of carbon trading in Congress: “Washington needs to have evidence from California that the solution being applied here works.”

China, Australia, Brazil and several other nations are considering cap-and-trade systems. And Chinese initiatives in particular were the talk of last week’s conference.

Veronique Bugnion, chief of analytics at Point Carbon, a research firm, noted that China, which has surpassed the U.S. as the world’s largest carbon emitter, plans to launch a trading market in six regions by 2013, with a goal of adopting a national program by 2015.

A cap-and-trade market, which sets a price on carbon emissions, is seen as an economic incentive to replace fossil fuel-powered plants with solar, wind and other renewable energy facilities. “The race for a cleaner and more energy-efficient future is on,” Bugnion said. But unless California regulations “put a smart price on emissions, a price people can use to plan for new facilities, a price companies can rely on to innovate … China will eat California’s innovation lunch.”


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Hot: Living Through the Next 50 years on Earth

--Margot Roosevelt

PHOTO: Valero's Wilmington refinery, near the Port of Long Beach.The company, which helped fund an unsuccessful 2010 ballot initiative to delay AB 32, California's global warming law, owns refineries that would be subject to the state's cap-and-trade system.Credit: Christina House /L.A. Times

Comments () | Archives (15)

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Another solid decision for California. Charge energy producers more to produce their energy and manufacturers more to manufacture so that they can pass that increase along to consumers. And where does this money go? Carbon credit traders will be enriched for creating nothing and will pour even more money towards eco-candidates in order to keep the sham going. By the time the public actually figures out how bad this is for their bottom line it will be too late. The term "snake oil" comes to mind. On the plus side, killing the economy should result in less polution.

@James Andrews - If you read the BBC source that you posted about March being cold, you would know that the next posting is about an increase in average temperature over the same period and that the source you quote does not disagree with the scientific consensus on the reality of climate change.

The planet has a good chance of stabilising at 1000 ppm co2 within the next 150 years.I have high hopes for the CA co2 market.As the situation stands now the US is completely abdicating its responsibility to regulate co2.If the methal hydrates (underground frozen methane deposits) off the Arctic coast melt then the planet is in dire trouble.A runaway warming effect with massive negative feedbacks will result.

Mark J. Fiore
Boston College Law School,1987

i'm a complete treehugger and i absolutely oppose the Big Bank giveaway and Big Polluter handouts that Cap and Trade would engender. it will absolutely, positively, without a single doubt RAISE prices with NO value.

if anyone in this state cared about carbon sequestration as opposed to just constantly redistributing wealth from taxpayers and ratepayers to Big Energy and Big Banks, we would be PRESERVING CALICHE ECOSYSTEMS, which are proving to not only pull carbon from the air (like all plants) but then to push it deep into the earth where it bonds with calcium and remineralizes as calcium carbonate (unlike most plants).

this research is incredibly promising, so to kill off our caliche ecosystems (aka deserts) for Big Energy (yes Big Solar is Big Energy) is beyond insane. Local solar will spare the sequestering ecosytems AND BE CHEAPER than Big Solar and Big Transmission plus Cap and Trade. we just can't waste more money on making the problem worse, and that's what Big Solar and Cap and Trade do.

what we have is the Feds pouring billions more taxpayer dollars into the pockets of Chevron, BP, Goldman Sachs, Morgan Stanley, etc for their Big Solar boondoggles on PUBLIC land so they will monopolize our sunshine and sell it back to us, then CA giving those SAME companies control over carbon markets AND free pollution credits. billions and billions of our dollars will be wasted while GHGs will spike and our built environment will be left without clean energy on its rooftops, parking lots and brownfields. lose/lose/lose!

it's time for CA to stand up for what is right, reverse Arnold's corporate cronyism, and DEMOCRATIZE the grid with clean, privately owned rooftop solar systems. that will do far more to clean the air and atmosphere than any amount of parasitical banking industry fraud or Big Solar greenwashing.

I know the science is settled and decades of increased CO2 accumulated over the decades and cause the temperature to rise. So how did it take a month off? The global temperature for March was the coldest March in 17 years. If the effect is cumulative, how can it drop? If it drops, why didn't it go down to like last years? How does a cumulative effect just vanish for a month?

Could it be there are other effects on the increase or decrease in the temperature? I don't know, maybe cosmic radiation and sun spot activity? I know the physicists that claim man made global warming are all idiots but they predicted the temperature would drop when the sun spots eased and it did. How do we keep these quacks from claiming to know more than the UN scientists that got it wrong?

Here is the BBC article on March being COLD.

What a fraud. It is not the CO2 in the greenhouse effect that causes the warming, it is the addition of the energy photon. You can't have warming without adding energy. CO2 doesn't create energy.
Every night we have a reduction in the energy coming in. With fewer energy photons there are fewer greenhouse gas absorptions. The temperature goes DOWN, even though the amount of CO2 keeps going up. The so called science that more GHGs means more warming (per Arrhenius and the IPCC) is just not valid.
The CA Court decision on implementation of the Cap & Trade process by CARB was required to assess other options for a cost benefit alternative. Doing nothing, since man can not control the amount of incoming energy, will cost less and have the same effect as implementning cap & trade.- ie NO EFFECT. If the CARB does NOT implement the do nothing option then they deserve to be sued for damages. Unfortunately you can't sue yourself (OUR Government) BUT you can sue them for fraud under the Government fraud waste and abuse statues impelemnted in 1987 in Ca. Conscious fraud becomes a criminal offense. Enjoy the jail time CARB!!

Yes, cap-and-trade will work to further disadvantage California nationally and internationally in any economic recovery. The U.K.'s experience with cap-and-trade has its domestic energy producers paying 18% more and its energy consumers paying 33% more by 2020.
All green costs more!

To claim that "The European system... is on target to slash emissions by 21% below 1990 levels over the next decade" says more about the numbers games that emissions trading allows for, and the lack of ambition in the EU's targets, than it does about the effectiveness of the Emissions Trading System (ETS). In fact, the EU ETS has failed to reduce emissions, with the "cap" (limit on emissions) set higher than the actual level of emissions in five of the last six years. Companies have consistently received generous allocations of permits to pollute, and have now built up a surplus that means they need take no action to reduce emissions domestically until at least 2017 - yet can still meet the EU's reduction targets. The scheme has also pushed large subsidies the way of polluters (a summary of these trends, and what they mean for the future of the scheme, can be found here: ).
There are also proposals on the table to link the California and EU schemes - which could stimulate a "race to the bottom", with money following the easiest to achieve "reduction" (that exist on paper only) rather than encouraging polluters to change their operational and investment practices.

Great! Yet another reason I can use to lure companies from California to my state. California, I don't know what I would do without you.

Dear California:

I don't supposed you are aware that your state is a laughing stock in the United States. Cap and Trade will work alright. Your state will lose even more of its businesses to other states and you are already bankrupt. Cheers.

In Europe, Cap and Trade has lead to widespread corruption and billions of dollars in fraud. Of course it won't work here. Progressives have decided for us. What the rank and file Progressives haven't figured out yet, is that their precious green agenda has been hijacked, and corruption isn't just a result of cap n trade - it's the purpose of cap and trade. Now that's progress!

No fraud ever turns into a value.

I'm concerned a cap-and-trade program will foster corruption, and green-light polluters to keep polluting rather than fundamentally change their ways.

Recent reporting of green house gas levels in the atmosphere show a 6% reduction in 2009 due to the recession. Since California's recession will be ongoing for several years, global warming will decrease over time without Cap and Trade. That is, if anthropomorphic CO2, CH4, etc. actually cause warming more than natural emissions. Only Al Gore will profit from Cap and Trade.

California deserves to go broke; they are just tooooo dumb. Cap n Tax is a fraud. It will only make citizens pay out lots more money for utilities.
The new Gov just signed up for bumping the required renewalbles to 1/3rd by 2020 and that will be a train wreck again costing WAY TOOOO MUCH


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