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Cap-and-Trade Program Between California and Quebec Expands

California and Quebec have expanded their program to trade carbon credits between them in what proponents have said is a success given that the allowances have sold out and at prices above the floor that had been set. It raised $850 million with the money going to fund clean energy technologies in the two jurisdictions.

“The Market Monitor found that the auction was cleared consistent with the auction clearing rules in the regulations and appropriate economic logic,” said a joint statement issued by both jurisdictions last week.

The allowances sold for about $15 a metric ton, which is about $1.50 greater than the $13.50 floor that had been set. A key reason for the higher — and healthier — prices is because California extended recently its cap-and-trade program from 2020 to 2030. That ensured a steadier demand for the credits and that businesses would take steps to cut their pollutants. Can that continue?

Cap-and-trade is a free market plan in which businesses that can meet the limitations on carbon releases are able to bank credits or to sell them to those businesses that are unable to do so. As the ceilings are gradually lowered, the rate of those releases will fall.

Here in the United States, California has one set up as do the Northeastern states. While the format can differ, many such plans use the sale from credits to fund new technologies that serve to reduce emissions further. California has raised $4.4 billion since 2012 from selling credits, the state has said.

The “auction results show one more data point in the example California and Quebec are setting for the world in how to implement effective climate policies. This example was on display at the recent UN Conference of Parties (COP23) in Bonn, Germany …,” Erica Morehouse and Katelyn Roedner Sutter wrote for the Environmental Defense Fund.

Critics call such schemes a tax on business while proponents say that they are based on free market principles and similar to the program established for sulfur dioxide, or SO2, under President George H.W. Bush in 1990.

In February, a California appeals court upheld the state’s plan to cut carbon — one that the California Chamber of Commerce had argued against, saying it had forced businesses there to move across state lines.

The California Air Resources Board had initially set up the program in 2011. It subsequently won the first legal challenge in the district court, although businesses challenged it and said it was a tax enacted by an unelected state board. But the appeals court said that the buying and selling of credits is not the same as taxing companies; companies can choose to reduce their emissions in a number of ways that include purchasing offsets or buying permits from other companies.

That case, though, will head to California Supreme Court.

But the lawsuits have been just one issue. The other has been an oversupply of credits that has kept the price down to around $13 a metric ton — far below the $30-$40 a ton that is need to maintain a viable market; if the price per ton is too cheap, it may be cheaper to buy credits than to invest in new pollution controls.

California’s original goal had been to bring down carbon emissions to 1990 levels by 2020. Now the aim is to reduce those releases by 40% by 2030 from 1990 levels.

And by 2050, California hopes to have cut its greenhouse gas emissions by 80%, which would not just make it an example for other states but also for other countries. In the end, it will be a job creator, say advocates. To get there, the state will also employ other strategies such as vehicle emissions limits, energy efficiency standards and renewable portfolio standards.

The good news, according to the EDF authors, is that emissions covered by cap-and-trade have continued to decline — some 58 million metric tons less than they were a year ago. The bulk of that success is the result of utilities and electric generators increasing their stake in renewable energy and decreasing their dependence on coal imports.

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