To cool the planet
Friday, May 11, 2007
By Joe Nation
California’s groundbreaking global warming law, AB32, along with executive orders signed by the governor, requires California to cut its greenhouse gas emissions about 35% below current levels by by 2020 and a staggering 90% below current levels by the year 2050. How in the world will California meet those aggressive goals?
There are three different paths to achieving those reductions. The favorite among most politicians is the ATNA approach (All Talk, No Action.) Climate change is the hottest topic out there, particularly in the Bay Area. Jumping on the bandwagon; indeed just uttering the phrase “climate change,” offers a big political payoff. But don’t expect many politicians to call for smaller, more fuel efficient cars, or any other sacrifice from voters. Also don’t expect ATNA to help California meets its commitment to reduce emissions.
A second approach is what I call R3, (regulate, regulate, and then regulate some more.) That is the approach favored by most Democrats and bureaucrats in Sacramento. R3 requires those state bureaucrats to simply set mandated emissions reductions and demand that businesses, individuals, and others meet those targets. For example, R3 might force electric utilities to reduce their greenhouse gas emissions 50% over 10 years. Bureaucrats imposing those reductions don’t really care how the utilities get there; the utilities just have to get there, or face massive fines or may even be forced to shut down. (This approach also has broad political appeal. Beating up utilities and other polluters is always good theater.) The R3 approach doesn’t take into consideration the cost of those reductions, and the history of other emission reduction programs (such as for Sulfur Dioxide and the U.S. Acid Rain Program) shows that we pay much more for fewer reductions.
The final approach is to use the market. This approach is heavily favored by Republicans (although, ironically, only one Republican legislator, out of 47 total voted for AB 32 and its market mechanisms last year). The key to this market approach is the establishment of a “cap and trade” system where individuals, companies, and even governments must limit their greenhouse gas emissions to a set amount. If they exceed that amount, they can pay someone else to reduce what they cannot. Commonly called “offsetting,” this approach can allow us to become “carbon neutral,” i.e., reach a point where our net carbon emissions are zero.
Each of these approaches has advantages and disadvantages. (Well, maybe not ATNA.) And in the end, California will need both regulation and market incentives to meet its very aggressive targets.
Unfortunately, many of the same legislators who voted for AB32 now question whether there is a role for market mechanisms in this battle. I understand some of the concerns about using only the market to create incentives to reduce greenhouse gases, but to dismiss the potential of the market is absurd.
Critics of market mechanisms often point to three main objections: the over-allocation of allowances (resulting in market prices for credits that are too low to encourage investments in alternative energy), lack of oversight of the market, and failure of the market to actually reduce emissions. Let’s deal with those concerns one by one.
Over-allocation of credits is a legitimate concern. That is, in fact, the most significant problem experienced in the European Trading System (ETS), which has been operating for two years. But the ETS, with multiple national jurisdictions, relied on an overly political allocation process and the guidelines for those allocations varied from country to country. That is unlikely to happen in California, in particular, if California issues at least some share of emissions credits by auction. Auctioning limits over-allocation since no one will bid on credits they can’t use or sell.
Lack of market oversight is a misplaced concern. There have been numerous media reports about “carbon cowboys” selling offsets that are, indeed, less than legitimate. But setting offset criteria, i.e., ensuring that offsets result in real emissions reductions, and are verifiable and permanent, will minimize these risks. Furthermore, businesses and other buyers will quickly learn to tell the difference between legitimate offsets and snake oil for their own financial well-being.
A cap-and-trade system doesn’t merely shuffle emissions from one area to the next. Criticism that it does is without merit since California must now by law reduce overall emissions over time. The job of the market is to ensure that those reductions occur at the least possible cost, something the market does far better than regulation.
Regulations have their place, in particular in the transportation sector where we desperately need new fuel efficiency standards for automobiles. In the end, however, we will need every tool in our toolbox. California should use regulations, the market, and the kitchen sink because that is what is required to win this battle.
Joe Nation, a former member of the state Assembly, teaches microeconomics and climate change at the University of San Francisco.