By Connie Kwong
On Wednesday, Feb. 26, Californian officials proudly announced that companies spent over $1 billion in the state’s latest carbon emissions credits sale. This was the largest auction since the cap-and-trade program included in AB 32 legislation began in 2012. Under cap-and-trade, companies set a limit on the amount of carbon dioxide and greenhouse gases they can emit. However, companies that go over their limits can buy carbon credits – each representing one metric ton of carbon dioxide – from companies that emit less instead of paying a fine.
The textbook explanation for this monumental surge in emissions trading is that California greatly expanded the pool of credits available for sale when new policies related to AB 32’s cap-and-trade program went into effect on Jan. 1, 2015. The program now includes distributors of transportation home-heating fuels, and this roughly doubled the cap-and-trade market size. Already, the state has sold all 73.6 million permits offered to cover 2015 emissions, in addition to 10.4 million permits offered to cover emissions in 2018. The cap-and-trade program is a major element of California’s ambitious plan to reduce greenhouse gas emissions to 1990 levels by 2020.
Cap-and-trade advocates argue that the program is effective because it’s a market-based solution that incentivizes companies to adopt more environmentally friendly practices. However, cap-and-trade is not an adequate long-run solution to energy sustainability because limiting carbon emissions does not directly equate to reducing dependence on fossil fuels.
How do we measure success?
Despite its popular support by many environmentalist advocates, cap-and-trade is difficult to distinguish as good or bad because of the lack of consistency in its effectiveness. The European Union Emissions Trading Scheme (EU ETS) is the world’s largest carbon trading market with 31 member countries, making it a crucial case study. The widespread criticism for the EU ETS is well warranted. In order to appease unhappy (carbon-intensive) industries, the EU overallocated emissions allowances. An excess supply of carbon credits caused prices to fall, making it easy for these industries to avoid the costs of emissions reductions. Although the EU has made efforts to address this excess supply problem, many major industries continue to receive free permits. Therefore, the EU’s example demonstrates how market-based solutions are limited in their ability to truly incentivize businesses from reducing their emissions. This magnifies how the political role that corporations play in society is not necessarily a positive force for change.
However, cap-and-trade seems to be enjoying success in California. While geographic and economic differences from the EU should obviously be taken into account, perhaps we can consider the Californian model an example that other states can follow. California is known for both its environmentally progressive politics and its car culture. Gas is crucial to the economy and many Californians’ lifestyles. The California Air Resources Board reports that transportation fuels account for nearly 40% of the state’s greenhouse gas emissions, so adding transportation fuels to the carbon trading market reflects a pragmatic approach to cap-and-trade. This is a stark contrast to the European Parliament’s decision in April 2014 to exempt foreign flights from its emissions cap requirements until 2016 due to pressure from international trade partners. Learning from EU ETS’s overallocation mistake, California’s cap-and-trade program also instituted price floors.
Additionally, in Dec. 2014, California and the Canadian province of Quebec successfully held their first joint carbon auction as part of the Western Climate Initiative. All 34 million permits were sold, raising $407 million. The auction’s success should prompt us to consider how California’s role as a leader in environmental politics could have global effects as well. Also, when we consider how the United States is similar to the European Union in that the degree of interstate trade and commerce mirrors the economic integration between EU members, we can see more the potential for more integrated environmental policymaking across borders. For instance, many Californian environmental advocates and policymakers want other Western Climate Initiative member states like Oregon and Washington to adopt similar policies.
In a previous article, I discussed the role that corporations play in environmental sustainability. The fact remains unchanged that the environment and the economy are related, but this doesn’t mean that market-based solutions should completely dictate environmental policy. Incentivizing corporations is a politicized process itself.
The intuition behind cap-and-trade is that for some companies, it’s cheaper for them to buy more credits instead of reducing their emissions, and the opposite is true for other companies that can reduce their emissions. Therefore, the program allows companies who find it too costly to reform their practices to buy permits so they can continue to emit just as much, if not more. This market-based solution doesn’t change the status quo because it enables industries that are most addicted to coal, oil, and gas to carry on as before. Companies can also choose to move their business activities out of California and other cap-and-trade zones to areas where carbon isn’t priced and regulated. Emissions are essentially outsourced to other production locations, and trade liberalization policies allow cap-and-trade states and nations to continue or increase their imports of carbon-intensive goods. These “carbon leakages” therefore reduce or even reverse the efficacy of cap-and-trade policies.
It’s true that the popularity that cap-and-trade enjoys in environmental policymaking discourse is a good sign that carbon emissions are becoming an increasing concern for legislators. Much of the revenue generated from California’s carbon trading markets will be used to fund the state’s high-speed rail construction and other clean energy and green projects, and this is a good example of thorough policy design. However, this doesn’t change the fact that cap-and-trade is at best a short-term solution, and is ultimately unsustainable in its own regard. Policymakers need to pursue solutions that actually leave fossil fuels sources underground by promoting investment in cleaner and renewable energy sources such as solar, wind, and hydropower.
The struggles that the environmentalism movement faces are a perfect example of how it’s hard to do the right thing. And the limited capabilities of cap-and-trade further emphasize that it’s also hard to the right thing correctly. When we think about how this is an issue of environmental politics, we should also think of how the word “politics” comes from the Greek word politkos meaning “of, for, or relating to citizens.” Market-based solutions simply aren’t enough to fully mobilize the success of the environmentalism movement; a movement that is contingent on reorganizing the relationships between society, science, and technology in order to ensure more sustainable living conditions for the people.