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Market Failure
California May Have World’s Worst Carbon Market

California’s carbon market hasn’t worked as envisioned at any point during its relatively short life, but at this point it’s not an exaggeration to say it’s downright broken. It has so many problems that it becomes necessary to unpack them all in order to see the mess in all its glory, so let’s start with the biggest one of all: the price of carbon permits in the system just aren’t high enough. Bloomberg reports:

State officials initially set a minimum price of $10 per metric ton of CO2. The California Air Resources Board, which runs the auctions where companies bid on carbon permits, projected that prices could eventually reach $50 a ton. Instead, prices have traded closer to $12 per ton, leading to far less revenue than anticipated and raising questions about what, if any, effect the program has had in lowering the state’s carbon emissions.

Cheap carbon prices in a cap-and-trade system mean two things: first, little incentive for polluters and heavy emitters to change their ways, and second, a dearth of cash for the system operators to spend. That second issue is the most pressing for Californian politicians, who eagerly signed on to this regional scheme largely because they were promised billions of dollars in new revenue for the state—money which has yet to materialize. Bloomberg continues:

In the last fiscal year, ended on June 30, California’s cap-and-trade revenue fell about $600 million short of the $2.4 billion that Democratic Governor Jerry Brown had forecast. This year the shortfall looks to be much larger. The latest cap-and-trade auction, held on Aug. 16, fetched just $8 million for the state, with about two-thirds of the emission permits going unsold. That follows a May auction where only 10 percent of the permits were sold and only $10 million raised. Brown had hoped cap-and-trade revenue would hit $2 billion this fiscal year, money he was counting on to help fund his pet green projects, specifically a $64 billion high-speed rail system.

Did you catch that at the end, there? Governor Jerry Brown was “counting” on this cap-and-trade cash to finance his “pet projects.” He’s not the only one, either. One Californian assemblyman described this whole affair as “a feeding frenzy for a multitude of pet projects.” This is pork barrel politics, plain and simple.

But California’s cap-and-trade headache doesn’t end there, either. According to Bloomberg, one of the biggest reasons why no one is buying carbon permits (and therefore why the price of permits is so low) is because of a growing concern that these credits might end up being useless if a court challenge against the state’s plan is successful:

One reason companies have stopped buying carbon permits is that they may soon become worthless. The California Chamber of Commerce has challenged the constitutionality of the auctions, arguing in a lawsuit that cap and trade amounts to an illegal tax. An appeals court is expected to rule sometime in 2017. In the meantime companies are hedging their bets and buying futures contracts, which allow them to lock in a price to purchase carbon permits at a later date, while only paying about 10 percent of the cost upfront. “Why would anybody bid into the auction right now and pay hard cash?” asks Alex Rau, a principal at the carbon-trading advisory group Climate Wedge.

California state Senator Jim Nielsen summed things up nicely when he said that “the cap-and-trade program has been a failure…It really is a poor way to fund programs. It’s just a big way to get money for government.”

California’s struggles mirror those experienced by groups around the world which have found it difficult to put in place a market-based system that restricts emissions. The central problem with all of these markets is that they’re regional, so if the price of carbon in California or, say, the EU spikes too high, heavy industry will just pack up and move to friendlier environs (a process called carbon leakage). That’s the worst-case scenario, because not only does the state, country, or bloc enacting the cap-and-trade system lose economically, global emissions aren’t affected in any way. This is why the EU is struggling with too-low carbon prices, and it helps explain California’s travails as well.

However, with the whiff of pork hanging around its cap-and-trade system, Sacramento may be one-upping Brussels with its dysfunction, and that’s quite the achievement.

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  • JR

    This article makes no mention of the feelz. What about the feelz carbon markets give to Leftwingers? Isn’t that what’s REALLY important here?

    • Dale Fayda

      That, a “legacy” for Governor Dementia and a huge payday for several Democrat party constituent groups and donors.

      • JR

        If only California hiked the taxes on the rich just a tiny bit more, earthly paradise with a fast speed train station on every corner would surely be achieved.

        • Dale Fayda

          A tiny bit? Surely, you jest! A lot more! Think of it – lots and lots of “feelz” AND an earthly paradise with a high-speed train station on every corner!

  • LarryD

    Well, the whole idea of a “carbon market”, as I recall, was thought up by a private sector corporation to be able to “rent collect”. No surprise government appropriated it. The European version has been a disaster, with rampant fraud.

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