DURHAM -- The California Air Resources Board recently approved the nation's first comprehensive program to trim gases implicated in global climate change. Since this historic vote for cap-and-trade, many have questioned whether the program - aimed at providing financial incentives to polluters to reduce harmful emissions - could catch on and have a larger impact on climate policy in the rest of the country.
The new carbon market system is, by design, intended to be low-cost and lends itself to the creation of new clean technology. Those who can deploy clean technologies, such as North Carolina hog farmers, stand to benefit from the early market signals that the California program is sending.
History has demonstrated that California has stimulated national movements on environmental issues, even in times of recession. Decades ago, California adopted laws to combat urban smog, and the state's clean air law became a model for the federal Clean Air Act. Later, the state's Air Resources Board began making efforts to encourage the creation of clean cars, helping stimulate automotive technology improvements around the world.
Still, California's newest landmark regulation comes amid a crushed state housing market and record unemployment. In terms of economy and the legislative process, California appears to be experiencing extremes even more severe than the political forces that have stalled climate policies in Washington.
A central reason that carbon markets are a four-letter word in Congress is because they are framed as a cost, not a benefit. But a price on greenhouse gases, which a trading system creates, is an investment in a cleaner future. And, maybe most importantly, the new system is designed to keep the costs of implementation low.
Starting in 2013, the program will set a total limit, or "cap," on gases that large electric utilities and factories emit. The first source of cost savings is through the cap, which ratchets down emission limits slowly - about 2 percent per year. This gradual path helps firms plan, adjust and avoid unforeseen costs. With no required technology or formula to follow, firms may be innovative in the ways emissions are cut. This could be through combusting cleaner fuels, buying trading allowances from firms that are comparable and cleaner or purchasing low-cost "offsets" made outside the cap. Because it rewards clean firms in the form of dollars, it is a powerful economic spur to become even cleaner.
The offsets option extends this flexibility further by allowing an emitter in California to buy credits, say, from a North Carolina hog farmer who has installed technology to transform harmful gases from hog waste into turbine-generating electricity. An additional break on costs places offsets in a reserve for unforeseen events, such as a drought in the Pacific Northwest, which could cause the cost of imported electricity to rise unexpectedly.
Some, such as Google, are buying into the model by purchasing similar credits to offset emissions from their server farms long before California's new carbon market takes effect. And farmers here in the state stand to benefit.
By harnessing market forces, the potential for new technologies is also heightened. As the cap is tightened, a comprehensive carbon market gradually raises the price of carbon-containing fuels, making cleaner alternatives - from wind, solar or a technology not yet invented - more economically competitive.
For skeptics, the absence of a carbon price also helps to explain the Solyndra debacle. Sure, loans can help promising clean technologies make it to market, but such "technology push" factors are only part of the picture. Consumers won't demand or "pull" the product until there is a financial incentive to do so, precisely what a carbon price affords.
At the end of the day, global warming is a challenge that requires concerted international solutions. California's cumulative emissions cuts between 2013 and 2020, when the program phases out, come to just 1/22nd of what the U.S. emits during an average year. And while the state's law is insufficient to address the global problem, California's carbon market, replete with innovative cost containment features such as offsets and a reserve, can provide a road map for leaders in other states and in our nation's capital when they finally decide to act.
Jan Mazurek is director of strategy and operations, and Tim Profeta is director, at the Nicholas Institute for Environmental Policy Solutions at Duke University.
