California is the first state in the US to implement cap and trade for carbon this year. In the first auction of greenhouse gas emission permits, a total of $233 million was raised by the government at a price of $10 for each ton of carbon released into the atmosphere. This money will be used to reduce non-commercial electricity rates in order to smooth the transition to initially higher-price clean energy sources. This is mandated by law that green sources will account for 33% of total energy consumed in California by 2020.
This cap and trade system is the cornerstone of California’s landmark global-warming law, known as AB32, passed in 2006. Despite initial opposition by big business, the success of the first auction has shown that the business community has finally come around to take greenhouse gases seriously. Among the participants in the auction are big emitters like Chevron, Valero, and ConAgra.
How does carbon trade work? First of all, we have to understand the purpose. Its purpose is to create a limit and a market for carbon because there is a cost to be paid for too much carbon in the atmosphere in the form of carbon dioxide and methane. These greenhouse gases are causing climate change, which will adversely impact all forms of life on earth.
How can you put a price on carbon? There is no simple way to do it. The carbon existing in fossil fuels like oil, coal and natural gas are made by nature long time ago. They were resting safely underground until humans began to dig them out and burn them to obtain energy. Thus our industrial society has greatly disrupted the natural cycle of carbon in order to fuel our modern way of life without paying attention to the cost.
As you know, all the resources endowed by nature are usually taken for granted. They are carelessly consumed, exploited or wasted until scarcity occurs. We have seen this problem over and over with respect to fresh water, fresh air, virgin forests, and even oil. Long before the resources come to depletion, we have also discovered the damages done to our health and the environment such as air/water pollution and global warming. Then we finally learn the hard way that there is a price to pay, if not now then in future generations. We are in fact paying now as the prices of most raw materials have already gone up significantly, especially oil.
Regarding the price of carbon, the easiest way to create a price is to impose a tax on fossil fuels. Most industrialized countries have done that as witnessed in Europe and Japan where there is a high gasoline tax at the pump. In the US, the legislators do not have the guts to impose a high gasoline tax. Why? Americans are so addicted to gasoline because of their love affair with the automobile. They will vote any proponent of gasoline tax out of office.
A higher gasoline tax is also strongly opposed by big business such as oil companies, utility companies, and chemical manufacturers. Why? It simply eats into their profits. However, they cannot admit their profit motive so selfishly for fear of a public backlash. Therefore, big business employs a two-prong strategy. One is to discredit the climate sciences and the global-warming evidence as inexact, even a hoax. The other is to invent the fictional reason of job loss to scare the public. For decades now, they are hypocritically saying that a gasoline tax will reduce jobs despite their continued outsourcing jobs overseas. Sadly, a large segment of the population believes in the business interpretation. They naively think that big business cares more about their jobs than its own profit. Don’t they see that the fewer people big business employs, the more money it will make?
In the US, only a government with guts and spines can succeed in imposing a price on carbon. The state government of California, with public support, is the first one to do so. It avoids a direct tax on gasoline. Instead, it sets up an auction market for carbon emission permits to allow private companies to decide how much they want to pay. How does it work?
First of all, the government sets an overall limit for carbon emissions for California every year. The next step is to find out from the big industrial emitters the quantities of their annual greenhouse gas emissions. This will allow the state to issue an emission permit to each big emitter specifying an upper limit. These permits can be bought at the regular government auction where private companies participate. If a big company thinks that it may exceed the limit next year, it can bid for a higher limit in the upcoming auction. On the contrary, another company may find that it has a surplus limit due to better efficiency in operation and fuel consumption. It then sells the surplus in the upcoming auction to the highest bidder. This is basically how the system of cap and trade works. The purpose is to create a price mechanism for carbon and encourage companies to operate more efficiently to reduce carbon emissions.
Cap and trade is a new system being pioneered in California. It is by no means a perfect system. But it is a serious effort to cultivate the concept of environmental cost that reflects the damages of carbon released into the atmosphere mainly by the industrial and transport sectors, which people have ignored for a long time. After being installed, the cap and trade system will evolve according to the needs of society. Sooner or later, people will find out that this cost/value system makes common sense by safeguarding our health and the environment. In addition, it makes business sense because it rewards private enterprises for improved efficiency in energy use.