Carbon traders or corporate raiders?

California’s environmentalists don’t always see eye to eye. That’s especially true when it comes to the best way to reduce the state’s carbon emissions, as required by the landmark Global Warming Solutions Act of 2006, better known as Assembly Bill 32. Some environmentalists argue that carbon-trading programs offer the best compromise between free enterprise and government regulation. But environmentalists who oppose so-called “cap-and-trade” programs claim that compromise comes at the expense of the poor and minorities, whose communities are often the hardest hit by air pollution.

So when the California Air Resources Board released a proposed scoping plan for A.B. 32 featuring cap-and-trade as one of the program’s major components, environmentalists concerned with both reducing carbon emissions and improving conditions for lower-income communities were none too pleased.

“We know we’re buying a car as opposed to a camel or a horse, but the most important thing is that the car actually runs,” said Jane Williams, co-chair of the Environmental Justice Advisory Committee for A.B. 32 and executive director of California Communities Against Toxics. “We don’t even know if we’re going to be able to drive it off the lot.”

But proponents of carbon trading say the approach provides major polluters with financial incentives to reduce emissions and the flexibility to continue operating as the state makes the transition to cleaner energy sources.

“Global warming is a global problem, and removing a ton of carbon from the atmosphere should be encouraged whenever you can do it,” said Derek Walker, director of the California Climate Initiative for the Environmental Defense Fund. “You’ve got to throw every tool in the toolbox at this problem.”

California is the 15th largest emitter of greenhouse gases in the world. A.B. 32 aims to cut statewide greenhouse-gas emissions to 1990 levels by the year 2020, roughly 30 percent. Climate scientists acknowledge that the developed world will have to cut emissions significantly more than that—80 percent by 2050—to stabilize the amount of carbon dioxide in the atmosphere.

Cap-and-trade works by capping the maximum level of pollution allowed by large-scale polluters, such as power plants. A company is granted one credit for each ton of carbon dioxide it admits. If it stays under the cap, it may then sell its excess credits to companies that go over the cap via government auction. Companies design their own compliance strategies, which include reducing emissions, buying credits from other polluters and using banked credits from previous years. In this manner, carbon trading allows industry, not government, to determine the most efficient way to meet emission regulations. By 2020, electrical generators, the transportation-fuel sector, natural-gas suppliers and large industrial sources representing 85 percent of the state’s emissions will be capped.

“Trading is a way of creating enough flexibility so there’s not an economic shock at the beginning of the system,” said Walker. “Polluting industries should bear the brunt of the responsibility. But we need to find the least costly option for innovative solutions.”

When polluters buy credits via government auction, they don’t necessarily know what their emissions will be. Electrical demand might change with a heat wave, the economy may be sluggish or fuel prices could escalate. Trading permits polluters to “adjust to changing conditions over time,” explained Anthony Eggert, senior policy adviser to CARB chairwoman Mary Nichols.

Correspondingly, major industries pragmatically support cap-and-trade programs. The U.S. Climate Action Partnership, a group of businesses and organizations in favor of carbon trading, includes Ford Motor Company, Chrysler Group, BP America, Dow Chemical Company, General Electric and Shell. In March, the California Independent Petroleum Association, Western States Petroleum Association, California Chamber of Commerce and California Building Industry Association sent a letter supporting cap-and-trade to the governor. Prominent environmental groups, including the Sierra Club, Natural Resources Defense Council and Environmental Defense Fund, also support cap-and-trade.

This political compromise infuriates environmental-justice advocates, who note that cap-and-trade policies permit major polluters to keep right on polluting, often at the expense of poor communities. Williams explained that all of the 23 proposed new power plants in California are sited in lower-income areas.

“You’re not going to put a power plant in Beverly Hills,” she said. “You’re going to put it in places where there is already pollution.”

Williams added that if a region needs more energy, a company can build a natural-gas power plant and emit more pollutants by simply purchasing another company’s credits. Instead, she said, the state needs to focus on building clean energy, which would simultaneously serve two public-policy goals: poverty alleviation by creating green-collar jobs and a transition away from fossil fuels.

“We’re not making fundamental changes in the way we use and produce energy,” Williams said. “But that’s what we have to do to significantly reduce our carbon footprint.”

The Environmental Defense Fund’s Walker concedes the market-based approach isn’t a cure-all.

“There is no possibility that this will solve local environmental problems,” he said. “It’s a piece of the solution; it’s complementary.”

A.B. 32 sets the total emissions cap at 365 million metric tons of carbon dioxide, consistent with the level scientists say is necessary to help stabilize climate change. But if energy use doesn’t decline, there will be no overall drop in emissions. Without other programs, such as providing smart electric meters to help consumers cut energy use, it will be difficult if not impossible to meet A.B. 32’s goals.

Additionally, the scoping proposal calls for California to link to the Western Climate Initiative, creating a regional cap-and-trade market with six other U.S. states and four Canadian provinces. By collectively committing to emissions reduction, the state “will far exceed what California could do alone in the same period,” Eggert said. “Even if in California we reduced our emissions to zero, we will have an impact on the global climate, however, we will only have a small affect. We need everyone to reduce.”

But opponents say there’s another problem: Carbon-trading systems have failed elsewhere, sometimes spectacularly.

Such has been the experience with the European Union Emissions Trading Scheme, the most comprehensive program in the world, established with the adoption of the Kyoto Protocol in 1997. The program capped emissions on 40 percent of the region’s worst industrial polluters. But during the first implementation phase, there was no net reduction of greenhouse gases. The worst polluters paid nothing for the credits, but passed on the perceived value to consumers, reaping windfall profits. The program had perversely created an incentive to pollute more.

“I don’t blame people in the [United States] for reading those things skeptically,” Walker said.

“The No. 1 lesson learned is to have a strong and accurate reporting and verification system,” Eggert added.

Yet many of the details of the cap-and-trade proposal remain vague. For instance, the controversial use of “offsets” (reductions in emissions from uncapped sectors, such as forestry and agriculture) appears to still be on the table. Deliberations on the scoping plan begin next month; A.B. 32 goes into effect in 2012. CARB has until January 2011 to flesh out the details. Williams hopes environmental justice will be a part of the equation.

“We’re with the political system in saying that we need to reduce emissions, but do it in a way that makes sense for everyone. We’re not going to be on the receiving end of bad public policy. We’ve been there for the last hundred years and we’re not doing it again.”