With Federal Climate Policy Stuck in Neutral, California Moves Ahead

While there has been little progress on national climate policy this year, California has quietly continued to make strides in implementing its comprehensive greenhouse gas (GHG) emission reduction program. Last month, the California Air Resources Board (CARB) voted to finalize the regulations instituting California’s new greenhouse gas cap-and-trade program. This program is one key element of California’s comprehensive program to implement the Global Warming Solutions Act (or AB 32), which was signed into law in 2006 by Republican Governor Arnold Schwarzenegger. Last week, California joined with Quebec and British Columbia in announcing the creation of Western Climate Initiative, Inc. WCI, Inc. is a new non-profit corporation that will support the implementation of state and provincial greenhouse gas (GHG) emissions trading programs with an eye toward the creation of a multi-jurisdictional GHG market.

While not a substitute for national action, California’s action is a significant step in U.S. climate policy. California represents one-eighth of the total U.S. economy; if it were a country, California’s economy would place ninth in the world (see Figure 1). By 2015, the program will place a cap on 85 percent of the state’s emissions.

California was able to take this step based on the continuing strong support within the state for environmental leadership. Last year’s elections saw 60 percent of Californians reject an attempt to roll back AB 32 until economic good times returned.

While bolstered by support for AB 32 in the November 2010 elections, CARB recognized the need to proceed with care even while boldly stepping out in front of the rest of the country in implementing a broad cap-and-trade program. In its environmental review, CARB noted:

The task before ARB is challenging. It must construct a regulatory program to reduce greenhouse gas emissions to meet the 2020 cap, while at the same time ensuring that the program satisfies over 20 diverse and important goals and objectives, including minimizing costs, maximizing environmental and economic co-benefits, and avoiding increases in localized air pollution…. ARB is committed to monitoring the cap-and-trade program in a variety of areas, to ensure, among other things, achievement of the GHG emissions reduction limit, detection of market manipulation, and avoidance of unintended consequences (including leakage).¹

The program adopted by CARB took a measured approach in many ways:

• CARB announced this summer that it would use 2012 to make sure that the program infrastructure is in place and ready to go, delaying the start of the first compliance period to 2013;
• California is starting the program with substantial free distribution of allowances to industrial facilities to help protect against potential ‘leakage’ of emissions and jobs out of state, despite environmentalist concerns;
• facing criticism (and a lawsuit still pending before a state appeals court) that the cap-and-trade program gives too much flexibility to industry that could result in local emission increases, CARB has committed to an adaptive management plan that will track how companies respond to the program, monitor for unanticipated local air quality impacts, and respond to them should they occur;
• CARB is taking steps in cap-and-trade regulation design and through market oversight to prevent gaming of the California carbon market, including working with the Commodity and Futures Trading Commission and hiring experts to assist with market monitoring and surveillance efforts; and
• California is continuing to work with some of its Western Climate Initiative (WCI) partners, including Quebec, Ontario and British Columbia, on linkage of their market programs as the partners’ programs become established, in order to create a broader market.

Although you don’t hear much about cap-and-trade in Washington D.C. these days, California’s program is just one of many in the world that is using this program to reduce emissions. The European Union, with a quarter of the world’s economy, continues to operate a multi-sector GHG cap-and-trade program. China is establishing experimental cap-and-trade programs in several pilot cities and provinces. It will also be interesting to see how Australia’s new legislation — which creates a carbon tax next summer and shifts to a market based program in 2015 — plays out.

While the ultimate policy mix in the U.S. remains uncertain, policy makers should keep an eye on California and other greenhouse gas reduction programs to find the best approach to get on a low-carbon pathway.