27 November 2009
The Trouble with Cap and Trade
The California Environmental Protection Agency's Air Resources Board released its scoping plan, which was praised by governor Schwarzenegger, environmentalists, and utilities.
But is all the praise deserved?
The California plan follows the same outline of other such plans: a cap limits the amount of GHG emitted by power plants, refineries, cement factories and the like, and requires a permit for every ton of CO2 released into the atmosphere.
The trouble with a California program -- or a Western States Program or a Regional Greenhouse Gas Initiative like we have in the Northeast -- is that it's a patchwork approach.
If you're a company with a national footprint, you have to react to all sorts of different regulations, that's why some companies want a national program.
Yet even a national cap-and-trade program is a flawed scheme for dealing with CO2 emissions. Despite the prevailing sentiment that cap-and-trade is market-based, most of the proposed programs will hand out a significant portion of the permits for free, which could have the unintended consequence of keeping the price of permits lower than desirable.
The EPA estimates that the average price per ton will be around $15 for possibly the next two decades. That's until 2030 folks.
Some analysts say that utilities need a carbon price of $50/ton before they'll commit the billions needed for new technologies, such as carbon capture and storage and alternative energy resources. When will we get to a $50 price for carbon? When it's too late.
At that rate, the price of carbon won't be enough to create incentives for investments in low-carbon energy infrastructure, energy efficiency, and transportation.
The potential for gaming the system is equally troubling. There is little agreement about monitoring and accounting of the permits and projects that qualify, which could provide an avenue for unscrupulous speculators to take advantage of the situation.
A cap-and-trade program potentially creates windfall profits for utilities, but it is unclear whether it will generate significant reductions in emissions or investments in clean technology.
And some analysts think it is doubtful that cap-and-trade will even put a dent in fossil fuel's price advantage. Others fear that much of the transactional value of the assets created by any cap-and-trade program will be in the hands of some of the same folks who gave us the subprime mortgage and credit default debacles.
Finally, if we are going to have a cap, and that seems to be the way it's going, I'd rather see a cap-and-invest structure where you auction of the permits to the highest bidder and use profits to create an R & D investment fund rather than giving the permits away for free.
It seems to me these flaws need to be addressed in any scheme that gets adopted before we head down the road of future regrets.