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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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