California Launches 'Pay-to-Pollute' Carbon Market

Nov 13, 2012

An oil refinery in Bakersfield (file photo)
Credit Joe Moore / Valley Public Radio


The first part of cap and trade is the “cap.”  The state puts cap on how much pollution is allowed.  If an industrial plant or a utility generates more greenhouse gases then it is allotted, it has to go onto market to buy allowances to pollute.


Dave Clegern is with the California Air Resources Board, which designed the cap and trade program.

“We also learned that we do not want to allocate all the allowances free, because we need industry basically to have some skin in the game,” says Clegern.


But the state wants to ease participants in, so for the first two years they only have to pay for 10 percent of their allowances.  The rest they're given for free.



The cap on emissions goes down about 2 to 3-percent each year.

“As the cap comes down, there are proportionately fewer allowances available,” says Clegern.

This would likely drive the cost of allowances up.

“And it would become more beneficial, ultimately, to invest in reductions,” says Clegern.

So some businesses will likely invest in greener or more efficient technology, for a variety of reasons. And some will reduce emissions below their cap.

That's where the trade - or the auction - comes in.  These businesses will have extra allowances that they can sell to another business that hasn't been able to or chooses not to bring down emissions.    

And businesses that over-pollute can also buy “offsets.”  The Air Resources Board is verifying certain projects that actually absorb greenhouse gas emissions, such as planting trees.

The idea is to give businesses some flexibility in when and how they reduce their emissions - and use the market to manage those costs.


Samantha Unger Katz works for BGC Environmental Brokerage Services. Her company has been trading carbon allowance futures over the past year in anticipation of the auction. 

“Rules were adopted in June, we started to see the market price continue to go up. It reached a high of just over $20 a ton,” says Katz.

But then she says news came out questioning the legality of California's cap and trade program.  Some say its efforts to control the greenhouse gas emissions of power used in California could be construed as an attempt to regulate markets in other states.  That would be unconstitutional. 

“And since that point, we've seen a pretty steady decline in the pricing,” says Katz.


“I'm cautiously optimistic,” says Katz. 


Even if it does succeed in reducing California's emissions,  Anthony Eggert says climate change is a global problem.  Eggert is a former advisor to the California Air Resources Board.

“ What California is attempting to do is to become a model. And if you look at history, California has done this many times in the past,” says Eggert.

California regulators have designed the program so that other states - and even the county - could implement it. 
