Cap and Trade Rules
Cap-and-Trade Rules

Los Angeles Times
October 1, 2008

A new program by California and other Western states to curb pollution will work -- if done right.

California and six other Western states are preparing to launch a dramatic
campaign against global warming that will turn pollution into a commodity that
can be bought and sold, and create a market for trading hot air. It's an idea
that has been tested around the world and can be successful -- but only if it's
done right. As the state unveils further details Friday about how the program
will be structured, there are two principles that planners should keep at the
top of their minds.

The first has to do with the way carbon credits are allocated. Under a
cap-and-trade program like the one California is developing, a cap is placed on
the amount of greenhouse gases that can be emitted from sources such as power
plants, refineries and factories, with the cap steadily dropping over time.
Polluters, meanwhile, get emission allowances, or carbon credits, that they can
trade with one another -- it might cost, for example, $10 to buy the right to
emit a ton of carbon dioxide. The question is: How should these carbon credits
be distributed initially; should they be given away or auctioned off to the
highest bidder?

The clear answer is that they must all be auctioned.

In Europe, where a cap-and-trade program was launched in 2005, giving the
credits away proved a disastrous mistake. For one thing,a giveaway produces
unfair distribution schemes in which the companies with the most powerful
lobbyists get the most credits. For another, it tends to result in windfall
profits for corporations at the expense of consumers. Companies use the program
as an excuse to raise prices even when it has no effect on their expenses.
Auctioning is a fair way of setting a price for pollution. Moreover, the
government can use the proceeds from the auction to lessen the pain for
consumers. Energy bills for low-income residents might be subsidized, or more
public transit could be built to make up for higher gas prices.

The second principle has to do with offsets. In many cap-and-trade schemes,
polluters get credit not for cleaning up their own mess but for reducing
pollution somewhere else. Instead of shutting down a coal-fired power plant in
California, a utility might invest in a solar power plant in the Mexican desert,
for example. Offsets pose a host of problems. There's no way to know whether
that Mexican solar plant would have been built even without the utility's
contribution, nor is it easy to tell whether the amount of carbon saved by that
project makes up for the amount emitted by the California plant. Offsets also
tend to discourage innovation -- rather than invest in new technology at home,
the utility is simply buying existing technology in Mexico -- and they reduce
the clean-air benefits to the state. The fewer and more restrictive the offsets
allowed by California, the better.

Lobbyists for utilities, oil companies and other polluters are working
feverishly behind the scenes to maximize free carbon credits and offsets. If
they succeed, California's fight against global warming will be less effective
and more expensive for consumers. State air regulators and Gov. Arnold
Schwarzenegger must make sure that doesn't happen.


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