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California’s climate-change experiment

By Editorial Board,December 30, 2012

STARTING ON JAN. 1, California will begin the nation’s most ambitious experiment yet in fighting climate change, and it will do it more or less alone. For environmentalists depressed by years of the United States’ unproductive “debate” on global warming, this moment is heady — and perilous.

Beginning in 2013, the nation’s largest state, the ninth-largest economy in the world, will put a price on the greenhouse gas emissions responsible for global warming. California has established a cap-and-trade program, a design similar to what Congress considered but failed to pass in 2010. Perhaps the Golden State in the new year will prove once and for all that markets can and should be marshaled in the fight against global warming.

Pricing carbon emissions is undoubtedly the right concept. California’s cap-and-trade mechanism is supposed to minimize costs by establishing a statewide limit on total emissions and a market where businesses can buy the right to pollute a certain amount under that cap. When firms and their consumers must pay for their emissions, they find the cheapest ways to pollute less.

But California’s experiment might not work well enough to persuade others to follow along. The most obvious problem with the plan is that it relies far too little on the market-based cap-and-trade system and far too much on other, expensive, command-and-control regulations. State officials expect to achieve only about 23 percent of their planned emissions reductions through 2020 with carbon pricing, and it’s not clear what happens after that. The cost of the whole package, then, is likely to be higher than necessary.

Even if that were not the case, there are other potential problems that flow from the fact that California is acting alone. As with any market, the bigger a carbon market is, the more efficient it is. But the group of Western states that were going to join California in creating a linked carbon market have not followed through. That not only reduces the size of the market California is creating, it could also dull its effectiveness.

Affected companies could move out of state and pollute just as much as they would have before California imposed its program. Out-of-state electricity generators, meanwhile, might try to reshuffle where they send their product — cleaner stuff to California, dirtier stuff elsewhere — instead of lowering their total emissions. Ironically, these issues, called carbon “leakage,” might make their own solution — a national carbon price — less attractive.

California’s plan — cap-and-trade and other elements — also faces legal challenges, since its requirements affect interstate commerce, a policy domain the Constitution reserves for the federal government. Opponents claim that California is attempting to regulate businesses in other states and even to discriminate against out-of-state products. State officials express confidence that they will win the legal argument, but that, too, is not assured.

In its final preparations for Tuesday’s launch, California held an auction for 2013 carbon pollution rights this month. The rights sold at only a few cents above their legally mandated minimum price.

Simply establishing a carbon price is a very large step; from here, policymakers can streamline the policy and attract other states into finally linking up with California. Perhaps — if it survives the courts, and the court of public opinion.