California experiments with Cap and Trade

The United States came close to setting its own emissions trading plan similar to the EU Emissions Trading Scheme. However, the American Clean Energy and Security Act of 2009 (ACES), an energy bill in the 111th United States Congress that would have established an emissions trading plan failed in the senate.

24 October 2012

The United States came close to setting its own emissions trading plan similar to the EU Emissions Trading Scheme. However, the American Clean Energy and Security Act of 2009 (ACES), an energy bill in the 111th United States Congress that would have established an emissions trading plan failed in the senate. For the critics of the act, this was a victory of sorts; however there is a silver lining for the supporters, with the passing of California's Global Warming Solutions Act (AB 32) which covers major sources of GHG (green house gas) emissions in the State. It must be remembered that cap and trade is not new to the US. Most large power generators have been trading sulfur dioxide emissions for years. The Regional Greenhouse Gas Initiative (RGGI) was the first market-based regulatory program in the United States to reduce greenhouse gas emissions. RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.

California's program will force GHG emitters to purchase allowances under an annual "cap". For its initial cap, the California Air Resources Board (CARB) set a CO2 limit of 162 million tons. This cap will reduce gradually over the next few years (3 percent from 2015 onwards). The first carbon allowance auction will be held on November 14, 2012 where the state will sell 61.3 million allowances.

We are not going to make judgments on whether this plan will benefit or impair the citizens of California. We have, however, heard of concerns from out-of-state power generator operators that sell power to California. They are worried about the uncertainty of their long-term contracts, while the in-state power utility companies are worried about managing power requirements for the future.

In my personal opinion, we will have to wait and see. Without trying, we wouldn't know. Maybe this does spur new innovations going forward, and the market reaches a potential equilibrium. What do you think is likely to happen? Share your views with us by leaving a comment below. For the next blog, I will perform a literature research on other cap and trade programs around the world.

Today’s expert blogger is Nikhil Kumar, Program Lead – Utility Economics for Intertek. Nikhil is based in Sunnyvale, CA and is leading the Smart - Asset Integrity Management (AIM) services business for the company.