California’s Cap and Trade Fuels a Carbon Market

James Goldstein (Executive Officer, CARB): It was just 23 days ago that our cap and trade program went into effect and set what will be the world’s second largest carbon market. Despite all the many allowances, benchmarks, offsets, and, one of my favorite phrases, leakage, I don’t want us to lose sight of what this means for California, the nation, and the world. I’ve had the privilege of participating in a number of VerdeXchange Conferences, and I find them important because it puts me among people who share my faith and hope in the power of commitment and ingenuity. Some see doom and gloom when they talk about the warming of the planet; others see climate change only as a way for the government to get bigger. But I think for most of us here today we see an opportunity to mitigate the impact of the warming of the planet. 

We are also establishing cost effective practices that are more sustainable for the environment, that help grow the economy, and that create wealth. My board approaches this challenge with the conviction that protecting the public goes hand-in-hand with economics. AB 32 is far more than an effort to reduce greenhouse gases. AB 32 is putting us on a path towards energy security and economic sustainability. It is designed to accelerate California’s transition from an economy powered by fossil fuels to one grounded in more efficient, reliable, and cleaner energy. 

It is the Air Board’s goal as lead agency on this law to help make that transition as seamless, painless, and equitable as possible. We developed a comprehensive approach of cognitive strategies to cut emissions, including excessive emissions inventory and reporting system. All of these rules and regulations are important, and many are designed to achieve not just climate goals but other energy, economic, public health- and transportation related goals. We feel the suite of AB 32 measures is also a powerful and well designed vehicle to help California stay competitive in the global clean tech market. Most of you here are interested in our measure cap and trade, which my board finalized in October, and as I mentioned, is now enforced. 

Cap and Trade provides two crucial elements needed to accelerate our transition to a clean energy economy: a steadily tightening cap on emissions and a cap on carbon. A carbon cap provides certainty. We see it as our insurance policy for meeting our greenhouse gases reduction target covering about 85 percent of totals saved on emissions. So if our other climate measures do not deliver, facilities that are regulated under the cap will nonetheless be required to reduce emissions enough to meet the goal. How they choose to do so under cap and trade is up to them, but it’s that compliance flexibility that significantly increases the cost effectiveness of the program. 

The other key element of the cap and trade rule is the establishment of an economy-wide price on carbon. This sends a clear signal that we are serious about powering our economy with clean, less carbon-intensive technology, and an investment in them will be financially rewarding. So now what? What’s our next step? This month the regulation took effect, and this gives the industry a full year to prepare for the first compliance period, which will be 2013. We expect to have our market tracking system in place very shortly and participants are registering for the market now. In august we said we would conduct our first quarterly auction of emission allowances. Starting in 2013, the major industrial facilities and electric utilities will have allowances and carbon offset credits. In 2015, the emissions trading market stands to include distributors of transportation fuels and natural gas. We designed our  regulation to ensure that the price on carbon is strong enough to send the right signal, but in a measured approach. We’ll push the transition to cleaner technology by initially distributing the majority of allowances for free. Though electric utilities are required to sell the allowances they receive and must apply the value of those allowances to benefit rate payers, for the industrial sectors we employ an approach to allocating the emissions allowances in a way that will encourage greater efficiency and production. If you’re a facility that makes the investments in cleaner fuels and more efficient production, you’ll benefit. Over time the emissions cap will gradually tighten, and for some sectors the allowances steadily diminish so that by 2020 we’ll reach the level we were at in 1990, which is roughly a 12% reduction from today’s levels. 

We crafted the regulation with the advice of many independent experts and with the steady participation of affected industries and stakeholders. We learned a great deal from analyzing existing emissions trading programs around the world, learning from their mistakes and the things they did right. We feel that they settle adjustments to our program to reach the right balance and to address the unique configuration of California’s economy. We’ve incorporated a rigorous program to allow carbon reductions in sectors outside the cap to help regulated industries cost effectively meet their compliance obligations. Currently that includes forest projects that sequester carbon, digestives that turn animal waste into beneficial methane fuel, and even an urban forestry project that would provide more shade and cool activities. 

The regulation is also designed to prevent fraud through the registration and tracking of all allowances and trades, a rigorous system of reporting greenhouse gas emissions facilities by facility with third party verification and limits on the amounts that entities can buy or hold. Meanwhile, we’re continuing to work closely with the Western Climate Initiative. We’ve recently established a separate entity, known as WCIE, to provide administrative and technical services to support the implementation of state and provincial greenhouse gas emission trading programs. This year we’re planning on linking with the province of Quebec, which adopted its cap and trade system just last month. British Columbia and Ontario are working towards linking with us as soon as possible. 

Being at the front of the pack is the role that California always claims. Our experience over the last 44 years has clearly demonstrated that the rest of the nation and, in some cases, the rest of the world follow our lead. In time and with a shift in the political climate, I’m certain that what we’re doing here in California and in the western climate initiative will serve as a model for a national program, both in Washington and in Ottawa. We’re now talking to others around the pacific rim, like Australia, about moving forward on climate change regulations and cap and trade programs together. Climate change cannot be ignored; we believe we are taking the right direction with AB 32 and with our cap and trade program by putting a price on carbon. We’re sending a clear signal to the world that California is a place to invest in a sustainable economy and to provide clean technology solutions.  

Robert Owens Jones (Assistant Secretary, Global Engagement Branch, Department of Climate Change and Energy Efficiency, Australian Government): The word emission failing system is not a particularly cuddly word; it doesn’t really resonate with the electorate. Honestly, the first time my child asked what I did for work and I responded, “I’m working on a emissions failing,” he just looked up and said “uh, what is that?” Cap and trade, I think, has the same lack of resonance. 

We put this into law a couple months ago. I think everyone knows how challenging it is to do this. This is the sort of major economic reform that a country does once a decade, and it’s really tough. I won’t go too much into it, but I can tell you the government was very pleased when it finally got through. Emissions trading systems becomes operational halfway through this year, so it will move quite rapidly. 

As the Department of Climate Change and Energy Efficiency, we’re a separate ministry of the state. That happened about four years ago when each of the elements dealing with climate change that various government departments were dealing with were taken out and all assembled together. As a commonwealth government we’re quite similar to the United States, and we run a very lean bureaucracy. It probably says a lot about the importance that we believe the climate issue has to have a thousand people working on this. In terms of size of our government departments it is as large as our bonds service. 

One of the criticisms that we often heard while working through our climate change package was “OK, you’re only responsible for 1.5% of global emissions, but it doesn’t matter what Australia does—it’s irrelevant.” We made a judgment some time ago in Australia that it was in our critical national interest to address climate change. We do want to try and work towards a goal of keeping the rise in global temperature to not more than 2%. That’s going to be very tough to be able to do; economies like our own have to more than half emissions by the middle of the century. You see, of course, the United States up at the top there, and China is the world’s largest emitter. We readily accept that as one of the major economies we have to play our full part.

Australia is already suffering from climate change, and our particular national circumstance is an unusual one. Australia is about the same size as the continental United States; we have the world’s driest climate as a continent; and we have the world’s most variable climate. When I was growing up in Queenstown we had these huge floods, the 1974 floods. It was said this was a once-in-a-century event, and hardly anything like this ever comes along. Last year, we had another big flood in Queenstown, and the flood lines are about two or three meters higher. It knocked off one percent off our GDP, so it’s like Katrina-style impact. We know climate change is happening, and we have to do something about it.

Australia is a bigger carbon polluter than California, even though California is more populated. There is a simple reason for that: the Australian economy is built on cheap coal. We are to coal what Saudi Arabia is to oil. Some of you might know this already: we are the world’s largest exporter of coal. There are only two countries in the world that have a greater dependence on coal powered electricity than Australia, and they are Botswana and South Africa. So it’s not a great record to hold when you’re trying to reduce carbon emissions. 

We have in Australia a legislation objective of reducing our emissions by 18% by 2050. That’s incredibly challenging for a whole series of reasons. Our population is growing at over one percent a year, faster than china’s population growth. We’re a country of migration. We’ve been very fortunate in terms of our economic growth; it’s all powering along, so our emissions on the business as usual basis are all going up quite steadily. 

Our minimum goal by 2020 is to reduce our national emissions by 5%, our 1990 levels. When I say this to Europeans, they say, “You’re really not trying hard, are you?” But when we put it in the context of Australian economy it means we have to reduce our per capita emissions by a third in seven years. That’s not going to be easy. 10 to 15 years ago a number of our states took on climate actions. In particular, they reduced our deforestation, and that had a big impact on Australian emissions. We have a very ambitious target; in many ways it’s comparable to California, we like to think, so what do we intend to do? 

Our carbon pricing systems have broad coverage—more coverage than a similar system in the EU. Perhaps it’s not quite as broad as coverage here initially, but we look to add additional sectors. Certainly in the first instance it’s going to cover energy, transport, and a few other things. When we look at the European approach and we look at your approach here, we see there are lots of similarities. There are a few things we are very grateful the Europeans went first on so we could benefit from their experience, both good and bad. We are going to have a period of about three years when we’ll have a fixed price. It’s about 25 US dollars a ton during that first three year period, and then we will go into a flexible pricing arrangement. For the first three years coming out of the fixed price period we will have a floor price and a ceiling price. In public debate we have people who are very concerned about the floor price, and we have another group concerned about the ceiling price. When we come out of the fixed price period we will be open to international trading, and, for me personally, that is the most interesting thing. We know that we’re not going to be able to do all of our emissions reductions within Australia—the price would be quite steep. With international offsets, the price will be about half of what it would be parochially. What it means in dollar terms is that Australian projects it will be purchasing about $4 billion worth of offsets a year by 2020. So it is a considerable investment, as you can tell. People talk a lot about the global carbon market: it’s still in its infancy, and it’s through discussions with countries that are interested in selling us their offsets that we will establish the global carbon market. That is actually quite an exciting prospect for the next five years, and we have to make it work.

When we think about the philosophy of attacking climate change, one of the things that California seems to have is an approach quite similar to our national approach: how do you approach managing land? If we think about global emissions in its totality, about a fifth of the global emissions come from land use. In Australia it’s about 23 percent. How we approach reducing emissions on our land is an enormously complex issue. Because we manage an entire continent our philosophy is quite different than, say, European philosophy. Some people would say that Europeans like to name every single tree they have. Australia can’t do that. We have to have a much more sophisticated approach to satellite mapping and to managing our land. It is an approach quite similar to how the United States works. We just put in place a very elaborate package for our carbon farming mission, and it is one of the areas we hope can explore in conjunction with California. 

One of the things that we have discovered is that the private sector doesn’t have a single opinion about how you approach carbon management, but many in the private sector can see that once you introduce a system there are opportunities to be made. One thing we’re finding is that there is a great uptake in interest in how people have accepted this legislation. There’s less of a fight in the public about how we approach it and more of a switch to how do we work with this and where can we generate opportunities.