Caveats on Cap and Trade: A Cautionary Note for California
January 14, 2010
As California’s Economic and Allocation Advisory Committee prepared to release its final report on creating a cap-and-trade emissions program in the state, RFF Senior Fellow Dallas Burtraw testified on the implications of the move before a key state legislative committee.
In his testimony, given January 7, 2010 before the Senate Select Committee on Climate Change and AB32 Implementation, Burtraw endorsed the cap-and-trade approach but also offered several warnings about pitfalls that should be avoided. Burtraw is a member of the Economic and Allocation Advisory Committee.
Citing the necessity of accurate monitoring and effective enforcement of the allowance market, Burtraw also detailed a plan for initial allocation of emissions allowances, upon which he said the success of the program depends.
He concluded with an appeal for openness in setting up the cap-and-trade program. “In my view, one very important criterion for this decision is that it be transparent and not masked in a complicated formula that may be perceived to serve private interests,” Burtraw said. “This transparency will help to build trust in public policy to address the challenges associated with climate change.”
The Economic and Allocation Advisory Committee released its final report on January 11.
Links to coverage
California Ties Cash to Energy – The Wall Street Journal
California Panel Considers Money From Climate Rules – The New York Times
Excerpts from the Testimony
“Another aspect of environmental integrity is the possibility of leakage of emissions or economic activity. There would be nothing gained, and it would seem hugely unfair, if emissions reductions in California led to increases by unregulated entities outside the state. There are two basic ways to address this problem. One is called a border adjustment, where importers of fuels that will release CO2 or goods whose production generates high CO2 emissions are responsible for surrendering emissions allowances.
“The other approach to controlling leakage is to rebate the cost of emissions allowances to producers that compete with unregulated firms. If this approach is used, it should be subject to a regular (biannual) test showing that the affected firms remain subject to unfair competition, and the amount of the rebate should be calibrated carefully to be the minimum necessary to avoid leakage. In addition, that amount can be calibrated to best practice in the industry. With these guidelines in place, I believe such an approach requires only a small adjustment to the program.
“It is worth noting that there is opportunity for mischief. The program design can be made unnecessarily complicated by efforts to address special interests or to directly control the market outcome. If the point comes when the program design starts to look as thick as the Chicago phone book, one might ask what is gained by the infrastructure of the market—the state might better rely on the traditional regulatory approach. But if the program design is smart, simple, and transparent, I am convinced it can provide dramatic cost savings while helping the state to achieve its environmental goals.”