California's Cap-and-Trade Program Has Learned From Europe

by Mary Nichols Originally appearing in Energy Biz Despite claims to the contrary, the European Union Emissions Trading Scheme is not dead. It will survive, but in the meantime the international community must keep moving forward with other efforts to reduce greenhouse gas emissions. Fortunately, California has been able to learn from the pioneering efforts in Europe, and as a result the state is poised to be a major player in the effort to fight climate change. The reason for California's leadership role in the international arena is clear. Efforts to reduce carbon emissions have moved from the national level to more vigorous advances at the so-called subnational level - states and provinces within national jurisdictions. Why are subnationals leading the way? States and provinces are more nimble than the national units that operate within the often cumbersome United Nations climate framework. Yet these smaller jurisdictions are large enough to establish meaningful models for nations to follow. California, after all, is the ninth-largest economy on the planet. In California's case, we must act. California is already seeing the effects of climate change on its water supply, and Californians are experiencing warmer days and fewer cold nights, rising sea levels, and longer and more severe fire seasons. Our response to this climate crisis is Assembly Bill 32, the Global Warming Solutions Act. Under that law, we developed a plan that includes a wide range of complementary programs, including our own emissions trading program, as a key element that effectively puts a price on carbon. We have already held three successful auctions. There is a vibrant secondary market, and we are poised to begin approving offsets from sectors not under the cap. One good reason for the success of this program is the fact that we followed, and where necessary improved on, Europe's emissions trading scheme. In particular, the EU ETS provided a number of important lessons on the design of an effective cap-and-trade program, including the need for effective mandatory emissions reporting and verification, a reserve floor price, an allowance allocation system that rewards the most efficient producers, and effective market enforcement. California's cap-and-trade program is designed to deliver emission reductions while addressing the specific needs of California's industrial and energy generation sectors. Because of the way our linkage process works, any future partners will have that same ability to build a program that keeps central focus on those reductions and their needs but built around a shared platform that tracks allowances and offsets. We have worked with Quebec for nearly five years in developing our respective programs and see linkage with the province's cap-and-trade program as an excellent opportunity to advance greenhouse gas reduction efforts using the next-generation international model. California's Mandatory Reporting Rule requires each facility to report annual greenhouse gas emissions. These reports are then verified by independent, Air Resources Board-trained, third-party verifiers, as well as audits by ARB staff. This is the most stringent reporting mechanism in the world. For the first two years of California's cap-and-trade program, industry receives 90 percent of carbon allowances free to help with the transition to a market that puts a price on carbon. Free allocations decline after that. Covered facilities can purchase allowances to cover the remaining 10 percent of emissions at quarterly state auctions. In this way, the covered industries set the price they're willing to pay for carbon, but no one can pay less than the reserve (floor) price, set originally at $10, and rising thereafter annually by 5 percent (plus an annual adjustment to accommodate the rate of inflation) to support investment in clean technology. Electric utilities receive allowances free, and then must sell them at state auctions to build a fund to protect their ratepayers from costs of complying with cap-and-trade. Under California's program, allowance allocations are based on production, not emissions, with facilities rated against a benchmark for each sector, rewarding the most efficient facilities. This avoids an initial miscalculation made for the EU ETS in which free allowances were allocated based on past greenhouse gas emissions leading the windfall profits, which rewarded the heaviest emitters at the expense of consumers. California has also developed the world's most stringent protocols and verification system for approving carbon offsets. Air Resources Board protocols will ensure that credited emission reductions are real, additional, quantifiable, permanent, verifiable and enforceable. Projects must be listed with an approved registry and verified by independent, third-parties trained by the ARB to ensure the accuracy of the accounting and the offsets generated by each project. Air Resources Board staff then does a separate review of that assessment before allowing the offsets to be registered as compliance grade. Projects must also be renewed regularly and undergo the same verification and approval steps before being relisted. We are all in this together. In remarks to Tsinghua University in Beijing recently, Gov. Jerry Brown said, "We're in one world. We've got one big problem and we'll all have to work on it. And what's beautiful and exciting about climate change is no one group can solve the problem - not the United States, not California, not Japan, not China - we all have to do it. This is a great unifier." Greenhouse gas emission reductions will continue under the EU ETS and while the countries of the European Union will maneuver through rough waters at present, a new model for fighting climate change is setting sail in North America. You might call it cap-and-trade 2.0. Ms. Nichols chairs the California Air Resources Board.

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California’s Cap-and-Trade Program Has Learned From Europe

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