Pricing Carbon
Cap and Trade Calamity in California

California’s foray into the world of regional carbon markets hasn’t been the grand success it was promised to be. As the Sacramento Bee reports, a recent auction of carbon credits brought in a paltry 2 percent of the revenues it was expected to generate:

Market analysts believe that there are still far more allowances available for sale than buyers want or need, and thus future auctions are likely to fall short as well…major underlying factors are still there – including a glut of allowances and uncertainty over the program’s legality and future.

On the one hand this is a story of the extraordinarily high degree of difficulty associated with deploying a carbon market in a single state or region. Just ask the European Union, whose own Emissions Trading System has a similar problem to California’s, namely an overabundance of credits that have depressed the price of carbon down to levels too low to properly incentivize companies to change behaviors. This glut of allowances stems from a fear of something called carbon leakage, which describes the process by which heavy emitters (read: industry) might pick up and move out of the state or region to a location where it can conduct business as usual. That’s the worst case scenario for designers of carbon trading schemes, because not only does it do nothing to cut greenhouse gas emissions, but it also becomes an economic liability as well.

That’s not the only issue with California’s cap and trade system, though. As the Sacramento Bee reports, the revenues generated by this scheme were meant to go towards programs aimed at reducing the state’s emissions, but predictably have been earmarked for politicians’ pet projects:

Assemblyman Adam Gray, D-Merced, in seeking a state audit of how cap-and-trade money is spent, supported by a coalition of business groups, termed it – accurately – “a feeding frenzy for a multitude of pet projects.”

One of the biggest is the bullet train, which is guaranteed a quarter of carbon auction proceeds, even though the Legislature’s budget analyst, Mac Taylor, warns that it would not, in fact, generate any net emission reduction by 2020.

Pork barrel politics is colliding head on with starry-eyed green policymaking in California, and the result isn’t pretty. The fact that this latest quarterly auction generated such dismal revenues is only the beginning of the state’s cap-and-trade problems.

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