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Pricing Carbon
California Keeps its Dying Carbon Market on Life Support

How’s this for bad optics? On the same day that California reported that sales of permits in its state-wide carbon market were well below expected levels, the state’s legislature passed a bill that would extend the broken program. Reuters reports:

[California’s carbon market] has come under fire from critics who have said the program suffers from a glut of permits, reducing the incentive for businesses to cut emissions and curtailing revenue from a program that funds key low-carbon initiatives such as the state’s high-speed rail project. […]

California sold just a fraction of the carbon permits offered to cover emissions this year, receiving the minimum price at an auction last week, regulators said on Tuesday.

Carbon market participants said the weak auction results were an indication that the program is oversupplied with permits and that businesses are uncertain about the program’s future, but added that passage of legislation to extend it should raise demand.

Starting a regional carbon market is a dangerous endeavor because the state, country, or economic bloc implementing this system runs the risk of chasing away its most energy-intensive industries if the price for carbon permits is set too high. That process, called carbon leakage, loses valuable business for the region while doing nothing to curtail emissions, and can properly be thought of as a worst-case scenario. As such, just about every region that experiments with a carbon market has erred heavily on the side of caution and over-allocated permits to keep prices low.

But time and again we’ve seen these low prices fail to incentivize companies to change their behavior. The EU’s market, currently the world’s largest, has long struggled with an over-allocation of permits, and as such its system has roundly been considered a failure by both environmentalists and economists alike. California’s experience has been no different, and this most recent auction underscores just how big the glut in permits actually is: no one bought permits to cover emissions for 2016, and just 6.6 percent of the permits being sold to cover 2019 emissions were purchased, all of those snatched up at the market-minimum price.

This failure comes on the heels of an auction in June that produced just 2 percent of the revenue it was expected to generate. But the state’s problems wouldn’t end even if companies were actually buying up permits as expected, as much of the money generated by the system has (predictably) gone towards politicians’ pet projects, rather than projects intended to help California reduce emissions, as intended.

The Golden State’s carbon market is in shambles, but it’s set up to fail even if it somehow succeeds. Despite all of that, California’s legislature is content to keep this farce alive for years to come.

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  • CaliforniaStark

    This is horrible news!! If the California’s carbon market fails, Governor Brown will not have the funds to build the bullet train — his major contribution to saving civilization and the planet.

    • Dale Fayda

      It has pretty much already failed and Brown doesn’t have the funds to build the bullet train neither with nor without it. Even if the carbon market had been functioning as its creators envisioned, Brown would still be tens of billions of dollars short of the final price tag.

      Verily, liberalism is a mental disorder.

      • JR

        The whole carbon market fiasco, as well as the bullet train boondoggle, is about one thing and one thing only. Signaling Leftwing virtue. These programs don’t work because they were never designed by people with knowledge of how to build large, interdependent systems. Instead they were built by clueless liberals looking for the right kind of feelz.

        • Dale Fayda

          They’re also massive payoffs to major Democrat party constituents and donors – unions, developers, lawyers, environmental groups and large corporations. It’s a fetid liberal swamp of interconnected special interests and inbred political loyalties and it’s being fed with our money.

          • CaliforniaStark

            “It’s a fetid liberal swamp of interconnected special interests and inbred political loyalties and it’s being fed with our money.”

            You have provided a great summary of California politics in one sentence.

      • rpabate

        I could not agree more that it is a mental disorder. By the way, I just read on David Stockman’s blog “Contra Corner” that, in the last three years, China has used as much cement as the U.S. used in the entire 20th century. Got to make you wonder whether the climate alarmists that came up with the fact that 2015 and so far in 2016 have been the hottest years on record took that into consideration along with all the other asphalt and cement used in India, Indonesia and the other developing countries. Ever walk across an asphalt parking lot after the sun has gone down. That heat is not carbon dioxide’s fault.

    • f1b0nacc1

      What is most amusing is that I rather think that Brown actually believes both of the assertions you make in jest…

      Of course it could all just be cynical graft-bait too…

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