cap and trade

By Cao Haili, ChinaDialog

China’s policymakers are beginning to accept the use of market mechanisms to achieve goals on addressing climate change and reducing energy use.

There are currently three major exchanges in China that trade environmental and energy assets, in Beijing, Tianjin and Shanghai. All were set up with support from local governments, and all began operations in the past year.

In the wake of the weak climate agreements reached in Copenhagen a little over a week ago, the price of carbon has dropped substantially. The main exchange for the carbon emissions allowances that are traded as part of the European Union’s Emissions Trading System saw carbon dioxide emissions drop to €12.4 ($17.90) a metric ton Monday.

Prices have been volatile throughout the ETS’s first five years. Permits had reached a high of €30 ($43) in summer 2008 before dropping to €8 ($12) earlier this year.

On the other side of the Atlantic, the U.S. House of Representatives passed a climate change bill in June based on creating a similar cap-and-trade system. Like the ETS, the proposed U.S. system would limit industries’ emissions and eventually force companies to pay for allowances to offset their emissions — or allow them to sell excess allowances if their emissions are lower than expected.

The fact that prices for those allowances are so low in the cap-and-trade systems that already exist might be troubling for proponents of such a system’s ability to mitigate climate change.

A new report released today by the Union of Concerned Scientists suggests that fears about a negative impact on small businesses from a carbon cap have been largely overblown.

The report focuses on the likely impacts of California’s Global Warming Solution Act (AB 32), but it holds lessons for federal climate legislation as well.

Lawmakers defeated the Australian Government’s climate change bill in a vote in the Federal Senate, driven by unusual political circumstances and parliamentary rules governing something called "a double dissolution election."

The Rudd government has maintained that it is essential for the nation’s climate bill to be passed before UN climate negotiations in Copenhagen, but its efforts to have the bill passed in time are being thwarted. 

The Carbon Pollution Reduction Scheme (CPRS) is the centerpiece of the Rudd Government’s climate and energy policy agenda. It seeks to implement a national cap-and-trade scheme with an ‘unconditional’ emissions target of 5% below 2000 levels by 2020. A more ambitious 25% cut will be established if a ‘strong’ global agreement can be reached in Copenhagen this December.

By comparison, the EU has agreed to reduce emissions 20% below 1990 levels by 2020, and will cut them by as much as 30% if other developed countries make comparable efforts. Pending U.S. legislation calls for cuts of 17% below 2005 levels by 2020, and 83% by 2050.

Rudd's centre-left labor government faces opposition in the Senate, where it must win the support of either the conservative Liberal and National parties, or a combination of the Australian Greens and two independent senators to pass the legislation.

But each party has divergent views on national climate policy, and despite recent polling that shows a majority of Australians support the government’s legislation, public opinion has failed to encourage compromise. Australia is the biggest per-capita carbon polluter in the developed world, relying primarily on coal for about 80% of its power generation.

The eventual passage of the bill is further complicated by the possibility of a ‘double dissolution election’. When the Senate rejects a government’s bill on two occasions—which is a much-discussed possibility for the CPRS legislation—a special election is held for all members of parliament in an attempt to break the deadlock.

A double dissolution election would benefit some political parties and would  disadvantage others, and the prospect has increased the hostility between the government, opposition, and minor parties.

While the Rudd Government will struggle to secure the passage of the CPRS, it finds itself in the paradoxical position to benefit significantly if it fails again. Welcome to climate politics, Australian style.

Part III of a three-part series on cap-and-trade looking at the successes, failures and lessons the U.S. government can learn from three programs already in place.

The European Union’s Emissions Trading Scheme creates a common market for trading permits to emit carbon dioxide in 27 countries and puts a price on carbon emissions. But the 5-year-old program isn’t flawless, and critics question whether it’s powerful enough to meaningfully affect global climate change.

Part II of a three-part series on cap-and-trade looking at the successes, failures and lessons the U.S. government can learn from three programs already in place.

The Regional Greenhouse Gas Initiative, a program to regulate carbon dioxide emissions in 10 Northeastern and Mid-Atlantic states, is proving a mandatory cap-and-trade program to address greenhouse gas emissions can work in the United States.

The program’s goals are modest — only one greenhouse gas is regulated and only power plants of at least 25 megawatts are covered. Emissions are capped at current levels through 2014, then the cap is reduced by 2.5 percent annually for four years until emissions are cut 10% by 2018.

Still, the fact 10 states overcame their differences to create a single compliance market to reduce carbon dioxide emissions is a “remarkable achievement,” says Judi Greenwald, vice president for innovative solutions at the Pew Center on Global Climate Change.

Also significant is that the system is working; the market has established a price for carbon dioxide emissions and power companies are willing to pay for allowances to emit.

“From a political perspective, it demonstrates that you actually can design and implement a cap-and-trade program in the U.S.,” Greenwald says. “A lot of people want to see a home-grown example. I think it’s very important that it’s working well and it’s working here.”

At the heart of the Waxman-Markey American Clean Energy and Security (ACES) bill is a national program to cap carbon dioxide emissions, with an accompanying market where polluters can buy and sell an increasingly limited number of pollution allowances.

Over the next few days, we’ll look at three cap-and-trade programs already in place – what works about them, what doesn’t, and what the U.S. government can learn.

Getting the U.S. Congress to consider a cap-and-trade program to reduce greenhouse gas emissions is no easy feat, but the fact it is even being considered at all owes much to the U.S. Acid Rain Program.

Created under Title IV of the 1990 Clean Air Act Amendments, the Acid Rain Program defied critics who saw it as a costly mistake that would burden the economy and concentrate pollution in regional “hot spots.” Instead, emissions of sulfur dioxide (SO2) and nitrous oxide (NOx), which mix with water, oxygen and oxidants in the atmosphere to cause acid rain, have declined dramatically nationwide at far lower costs than expected.

The reductions have had a significant health impact, too: The annual health and welfare benefits of the program are estimated to be $122 billion, in year 2000 dollars, and the prevention of “tens of thousands of premature deaths each year,” says Sam Napolitano, director of the U.S. Environmental Protection Agency’s Clean Air Markets Division. The annual cost of the program is $3 billion.

The program works because its central purpose is to reduce emissions, analysts say.

The first thing I noticed was that although we were just 20 miles south of where I started, the temperature was a good 15 degrees hotter.

The smells of tar and sulfur permeated the air. After a while, my eyes started to burn and itch.

I wasn’t in Nigeria or Iraq or Venezuela. My guide, Jesus Torres, otherwise known as JT, had taken me to Wilmington, Calif., in Los Angeles County, just 20 miles south of the L.A. beach town where I live.

Wilmington is home to 53,000 people – 45,000 of them Latino, 24 percent below the national poverty level – living in the midst of oil wells, oil refineries and the Port of Los Angeles. It was one of the stops on the Toxic Tour of Los Angeles that the organization, Communities for a Better Environment (CBE) leads. The group advocates around issues of environmental justice showcasing how our dependence on fossil fuels has impacted low income neighborhoods across the country.

Of the more than 2 million barrels of oil refined in California each day, 650,000 of them come from five refineries in the Wilmington area run by BP, ConocoPhillips, Tesoro and Valero.

SolveClimate had the luck to bump into New York Congressman Charles Rangel, chairman of the House Ways and Means Committee, as he arrived by train in Washington, D.C., on Monday, and he was gracious enough to answer a few questions about climate legislation as we walked along the platform. 

It was the day before President Obama addressed the joint session of Congress, asking for a cap on carbon emissions. When we asked Rangel how his committee would respond to climate law, here's what he said:

Whether it's cap and trade or a carbon tax, we're there.

On the question of where the money from carbon revenues should go, he voiced concern about protecting consumers from rising energy prices that a cap on carbon would bring: 

We've got to provide a cushion. No question about it.

Watch the video. It will make you feel like you're walking the platform at Union Station alongside the powerful Congressman as he pulls his own bag behind him. Unfortunately, we ran out of platform and the drive-by interview was over, but he gave us a peek into his intentions for influencing the shape and scope of climate law.

At issue is hundreds of billions of dollars of new revenues, so it should be no surprise that Rangel has his antenna up as chairman of Ways and Means -- that's why he said, "We're there." Since then, he has announced that his committee would be marking up a climate bill of its own before Memorial Day.

The last time we spoke with Professor Dan Greenwood of Hofstra University's School of Law, he explained the economic wisdom of a green recovery. In this latest interview, he explains how to regulate corporations for CO2.

He comes at the issue from perspective he's gained over a career studying corporate law and behavior. He explains how corporations are likely to respond to carbon regulations -- once they are in place -- as something to be complied with to the minimum extent possible. For example, he warns that under a cap-and-trade regime,

The cheapest thing to do is likely to be to sell your quota and then continue to pollute, on the assumption that it will be quite difficult for anyone to catch you anyway, and even if they do, they probably won't fine you enough to make it worth your while to stop.

His observations have bearing on the design and enforcement mechanisms of any variety of cap-and-trade system, or even a carbon tax, and he also explains how best to put a cap on carbon that no one can cheat on.

Here's how you help make it work. Ideally, you want each firm to be policing its competitor; or policing its suppliers, so that the government doesn't have to do it all. Government is not going to be able to do it all.

Please watch the video and listen to the good professor explain -- quite persuasively -- how and why.

With only one chance to get climate legislation right, given the lateness of the hour and the urgency of the need, his counsel is valuable, not only to those actually drafting legislation, but to those negotiating its shape, scope and bite.

If you understand corporate behavior the way Professor Greenwood does, you will design policy so that the polluters will not be able to outsmart the law, which they will try to do if given the chance.