California's Cap & Trade Shell Game Bets the Atmosphere
What is the Most Valuable Thing in the Entire World?
“What is the most valuable thing in the entire world?” “The head of a dead cat.” “Why?” “Because nobody can put a price on it.” - Zen Buddhism Stories, Trout Lake Media
California has made “Cap & Trade” (“C/T”) a central policy component of a decarbonized future, based on decades of claims by academics that a carbon credits trading market is the best way to achieve greehouse gas (“GHG”) reductions.
Sure, C/T avoids extremes of full government regulation versus complete inaction, and has been claimed to be successful in the case of mitigating acid rain and leaded gasoline pollution, but it:
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Has not been shown to be effective in reducing GHG emissions in other implementations.
Has been engineered by academics indoctrinated in the unproven belief that the market system is optimal for the task.
Can only ever be as effective as the assumptions underlying it are accurate and complete.
Put another way, C/T is a complex system of financial engineering with the stated goal of using “the market” to reduce emissions, while in fact it also adds friction and complexity to a time-critical need. It’s designed not to make anyone angry - especially the global petroleum industry and moneyed free marketeers.
A brief overview of C/T
In a cap-and-trade system, the government sets a limit (“cap”) on permissible emission levels and allocates pollution allowances among the industry participants which allow them to emit their pollutants up to the capped level.
Some allowances are freely allocated while others are sold at Government auctions. They can also be bought and sold in the secondary carbon trading market. If emissions exceed their allowance and cap, the polluters must purchase more credits or be fined.
In theory this will result in overall pollution reduction. The rationale is based on many assumptions, including:
If a company produces a higher level of emissions than their allocated or purchased permits allow, they are taxed and can be penalized for the violation. On the flipside, a company that reduces their emissions can sell their allowances to other companies that pollute more. Or “bank” the credits for future use.
Each year, the Government lowers the number of permits that are issued and therefore lowers the total emissions cap. As a result, permits get more expensive. Over time, companies have an incentive to reduce their emissions more efficiently and the logic is that they would benefit from investing in clean technology as it becomes cheaper than buying permits.
A Toy Illustration of C/T:
Stripped to its bare bones, C/T looks something like this -
Say Alice has a widget factory that emits 200 units of CO2 but she has a cap of 150 units. She also wants to lower her fuel bill and do a good thing for the atmosphere by installing a solar array that cuts her emissions in half, to 100 units. She’s now at her cap and has 50 units she can trade as credits to someone else. What she gets for the credits can help pay for the solar installation.
Then, say Bob has a power plant that emits 1000 units of CO2, while his cap is only 950 units.
The fuel he uses is so polluting it will cost $5000 to mitigate the excess 50 units. Bob goes to the open market and sees Alice’s 50 units for sale. Bob will buy those credits and keep emitting the same amount, as long as they cost less than $5000.
What could possibly go wrong?
This shell game where emissions that are mitigated in one place are just transferred elsewhere is quaintly termed “the waterbed effect” by economists.
The only way for this scheme to reduce emissions overall is for Government to manipulate the price of the units to make it more expensive to purchase the credits than to install mitigations.
So, if there’s to be Government intervention, why not cut to the chase and drive GHG reduction via a simpler and more transparent carbon tax? Because industry hates that.
In the industrialized view of reality, a C/T system with lots of fancy knobs and levers is what we need: Fines for excess emissions. Incentives for clean energy innovators. Price floors so credits don’t become too cheap. Price ceilings so the credits don’t become too expensive.
How do you balance fines and incentives? How do you keep the market “fair” and mitigate asymmetries between the participants? How do you police collusion? Where does the Government set floor and ceiling prices? What could possibly go wrong?
Then there’s what this looks like to implement. The current regulation document is 450 pages long, and contains poetic passages like:
“§ 95853. Calculation of Covered Entity’s Full Compliance Period Compliance Obligation. (a) A covered entity that exceeds the threshold in section 95812 in any of the four data years preceding the start of a compliance period is a covered entity for the entire compliance period. The covered entity’s full compliance period compliance obligation in this situation is calculated as the total of the emissions with a compliance obligation that received a positive or qualified positive emissions data verification statement, or were assigned emissions pursuant to section 95131 of MRR from all data years of the compliance period. (b) A covered entity that initially exceeds the threshold in section 95812 in the first year of a compliance period is a covered entity for the entire compliance period. The covered entity’s full compliance period compliance obligation in this situation is calculated as the total of the emissions that received a positive or qualified positive emissions data verification statement, or were assigned emissions pursuant to section 95131 of MRR from all data years of the compliance period. (c) A covered entity that initially exceeds the threshold in section 95812 in the second year of a compliance period is a covered entity for the second and any remaining years of this compliance period. The covered entity’s full compliance period compliance obligation in this situation is calculated as the total of the emissions that received a positive or qualified positive emissions data verification statement, or were assigned emissions pursuant to section 95131 of MRR for the second and any remaining data years of the compliance period. (d) A covered entity that initially exceeds the threshold in section 95812 in the final year of a later compliance period has a compliance obligation for its emissions that received a positive or qualified positive emissions data verification statement, or were assigned emissions pursuant to section 95131 of MRR for that year, but the entity’s full compliance period compliance obligation for the current compliance period is not due the following year. Instead the entity’s reported and verified or assigned emissions for this year will be added to the entity’s full compliance period obligation for the subsequent compliance period”
“What could possibly go wrong?” we ask again.
Can We Build It?
Not that our technocracy can’t handle complex systems. The Internet. The moon landing, James Webb telescope, Large Hadron Collider. The multi-trillion-dollar global financial system. “Can we build it? Yes, we can! Most of the time….” – but there are important differences between building those technologies and tackling existential threats to survival.
Humans as a species are likely to survive a meltdown of the Internet, the global financial system, or electrical grids. A failed manned space mission risks a handful of lives. But the outcome of failing to mitigate climate is much more uncertain and the tail risk (even if very low probability) is extinction (resulting in infinite harm) or de-civilization (almost infinite harm.)
So, is this Cap-and-Trade contraption the best way to reduce GHG emissions to maintain a habitable climate and global ecosystem within the limited time we have? Are we willing to bet the atmosphere, and with it, our survival?
Going Deeper into the Rathole
The bugs in the C/T system are actually features, machinations designed to satisfy the needs of the owners of the modern western industrialized consumer economy, who are only willing to mitigate environmental destruction if it satisfies shareholders.
This is discussed at length in a recent paper, “California’s ambitious greenhouse gas policies: Are they ambitious enough?” The paper is a deep dive into the myriad details of what can go wrong, or is already wrong, with C/T, deconstructing the perverse logic that gives us “the waterbed effect” and other counterproductive results.
It urges policy makers to devise a statewide plan that directly supports decarbonization across the entire economy, rather than the myopic (failed) market-price-based carbon mitigation approach more palatable to corporations.
“A statewide decarbonization project on the scale and scope required for climate stabilization may be too big a job for CARB or the California government to take on.... Regulatory policy should accommodate, facilitate, and help coordinate complementary and independent climate actions in support of the state’s climate goals; it should not undermine and discourage such actions by nullifying their environmental benefits. A core objective of state policy should be to empower individuals, businesses, communities, and municipalities to influence the scale and pace of decarbonization through their collective actions and investment choices, and to reap the economic dividends accruing from their choices.”
The Head of a Dead Cat
What does all this have to do with the Zen parable?
Not only does C/T as designed impede or deadlock decarbonization, but the most critical input to its economic model is missing. Nowhere in the design of C/T economics is any value given to breathable air, manageable climate and weather, or any other natural resource.
C/T tries to define a system to trade on the right to degrade the conditions under which all creatures have lived for the last tens of thousands to millions of years.
Industrialized academics have devised a numerical scheme to price the habitable world, called “The Social Cost of Carbon” (SCC.) An Internet search on this phrase will return pages and pages of studies – in which they attempt to define a metric that can be plugged into equations of climate-survivability-as-long-as-it-doesn’t-cost-money.
But California’s C/T system design, just like the California electrical net-metering NEM3 design, doesn’t even attempt to include this. There is no SCC analysis in California’s C/T regulations.
Consulting firm E3 plays a conspicuous role in the climate-vs-economics modeling behind not only NEM3 and C/T for California but much of the country. Yet they almost totally punt on SCC. For example, in their May, 2018 100-page document “Deep Carbonization in a High Renewables Future” they mostly reduce SCC to:
“Social costs of carbon are highly uncertain and depend strongly on discount rate and assumptions about climate damages.”
They simply can’t put a price on the head of a dead cat, the air we breathe, the water we drink, or a survivable temperature range. The financial design philosophy behind C/T ignores the most valuable things in the world - because you can’t put a price on them.
Yet nobody simply says “Maybe we need to stop fucking around with this stuff.”
Call to Action
Public comment on California’s Cap and Trade policy is closed, and the legislation is finished, so the work ahead is to exert influence on legislatures and CARB to evolve their vision of how decarbonization needs to be achieved.
“Climate stakeholders” (I don’t think I left anyone out, here) can be be part of this effort by
Subscribing to the C/T program email updates here.
Reaching out to CARB members listed here and reporting on what they have to say about missteps and omissions mentioned.
Reaching out to E3’s Tory Clark or email E3 at firstname.lastname@example.org and see if there are answers to some of the hard questions.
Reaching out to CARB’s Market Advisory Committee to vigorously lobby for changes due to the biases and omissions in the current plans.
Reaching out to your legislators – though they have less influence over C/T and have delegated their responsibility to CARB.
For more on whether California’s C/T plans include SCC criteria, Microsoft’s AI-powered search returned this result:
According to the web results, California’s cap and trade regulation does not explicitly include “social cost of carbon” analysis. The social cost of carbon (SCC) is an estimate of the cost of the damages created by one extra ton of carbon dioxide emissions1. It is used to evaluate the benefits and costs of policies that affect greenhouse gas emissions2. California’s cap and trade program is designed to achieve the maximum feasible and cost-effective reductions in California greenhouse gas emissions3, but it does not use the SCC as a direct input. Instead, it sets a limit on emissions and allows regulated entities to trade allowances and offsets within that limit4.
1. en.wikipedia.org 2. news.stanford.edu 3. arb.ca.gov 4. arb.ca.gov 5. edf.org 6. arb.ca.gov 7. carboncredits.com
A version of this article was published earlier at https://climaterealitysiliconvalley.org/blogs
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