

The cap-and-trade system, six years in the making, will force owners of power plants and factories to buy and sell permits to spew carbon dioxide into the atmosphere. If trimming emissions without trashing the state's economy works, it could be a model for the nation. If it fails, the fallout could doom federal climate-change legislation for years to come.

Under cap and trade, regulators set a limit on the amount of greenhouse gases the state's economy can produce, lowering the limit bit by bit, year by year. Companies buy and sell permits, called allowances, to release carbon dioxide and other heat-trapping gases. As the cap drops, allowance prices should rise, giving companies a powerful incentive to rein in emissions. The first allowance auction takes place Wednesday.

The idea has been used since the early 1990s to cut the sulfur dioxide emissions behind acid rain, doing so at a far lower cost than critics predicted. But sulfur is relatively easy to control because most of it comes from power plants. Carbon dioxide, in contrast, comes from electrical plants, factories, fires, cars, planes — even human breath.

Still, other states and countries have tried to apply cap and trade to carbon. The European Union in 2005 created a greenhouse gas cap-and-trade system that now covers 30 countries, although experts remain divided over its success. And nine Northeastern states have a carbon cap-and-trade market, but it covers only power plants.





A previous attempt to create a complex market, radically reorganizing the state's electricity market in the late 1990s, ended in disaster. Traders at Enron and other firms discovered ways to game the system, driving up energy costs, triggering blackouts and forcing then-Gov. Gray Davis from office.

Some business groups have predicted similar catastrophes with cap and trade, saying the system will jack up prices for gasoline and electricity and send California companies fleeing to other states. Several business groups, including the Western States Petroleum Association, have launched a petition drive calling on Gov. Jerry Brown to halt the auction before it begins. He has declined.


“If California goes belly-up, we can all point to it and say, ‘See, we told you so,'” said Myron Ebell, the director of energy policy at the Competitive Enterprise Institute think tank who helped marshal federal opposition to cap and trade. “But that's not a very gratifying option.”

“If it works, I'll be amazed — a lot of people will be amazed,” he said.