Cap-and-trade challenges

With adoption last week of the nation’s first comprehensive, state-administered cap-and-trade system to reduce greenhouse-gas emissions, California has once again led the way in combating climate change. This follows upon its earlier leadership in compelling reductions in vehicle emissions that paved the way for the assertive national efficiency standards adopted by the Obama administration in 2009.

The new California Air Resources Board regulations are the centerpiece of AB 32, California’s historic climate-change law that mandates a reduction in GHG emissions to 1990 levels by 2020. They require that, beginning in 2013, the state’s largest carbon emitters either meet the pollution caps set for them or buy credits from other emitters who have been successful in reducing emissions.

The system isn’t perfect. For one thing, it’s potentially vulnerable to the kind of gaming and manipulation an unscrupulous Enron did when California deregulated its electricity markets. Also, environmentalists worry that it will enable refineries located in or near poor communities to continue polluting at current levels, as long as they buy credits. And not all economists believe California is large enough to create a robust market in carbon credits.

But if cap-and-trade works, it could go a long way toward convincing other states and Congress that it’s an effective way to reduce greenhouse gases, does no serious harm to utilities, creates a higher level of certainty for investors, and fosters the development of alternatives to polluting fossil fuels.

To their credit, California voters are proud of their state’s leadership role in combating global warming and are willing to take some risks moving forward. Their hearty rejection of Proposition 23 last year was evidence of that passion. Adoption of cap-and-trade is the most important step taken thus far.