California Cap and Trade

California is scheduled to begin statewide regulation of all industrial carbon emissions in January of 2013.  This system, called “Cap and Trade” will set an overall limit, or “Cap” for carbon emissions by industry and utilities in California, and disperse a proportionate amount of carbon credits among these parties.  A carbon credit is a permit that allows a certain tonnage of carbon to be emitted by industrial entity. 

Because of the number of carbon credits are finite, the amount of carbon emitted is theoretically limited, and entities that pollute more can buy or “Trade” for credits from less polluting members on a market.  Hence, “Cap and Trade”.

This system is significant because it seeks to incentivize utilities to produce power with less carbon footprint.  It is a clever use of market economics that effectively amounts to a tax on carbon.

In his blog, Norm mentions that oil and utility companies have been historically opposed to any government efforts to limit carbon. (http://abnormalecon.blogspot.com/2012/10/californias-cap-and-trade-program.html)

This assertion is echoed by the New York Times in an article describing failed national cap and trade program which languished and eventually died in the US Senate in 2010, much because of opposition by fossil fuel industries and those who felt that any “tax” on industry would be a further nail in our countries economic coffin. http://topics.nytimes.com/topics/reference/timestopics/subjects/g/greenhouse_gas_emissions/cap_and_trade/index.html?inline=nyt-classifier

I think that California’s Cap and Trade program will be an interesting experiment, and whether or not it succeeds in the short term, is an indicator of a future where carbon is taxed.  Whether next year, or ten years from now, the effects of burning fossil fuels, I am convinced, will make evident the need to discourage carbon production.

This looming carbon tax, as well the finitude of our natural resources will, by economic principle, make fossil fueled energy more expensive to produce, and for consumers to use.

More than anything, I believe that more expensive unit cost of energy is the most important driver of conservation.  For example, in 2010, the average California resident used, on average, less than one quarter the electricity of a Wyoming resident.

http://energyalmanac.ca.gov/electricity/us_per_capita_electricity-2010.html

Not surprisingly, electrical rates in Wyoming are some of the cheapest, while rates in California are some of the highest in the country.  On average, though,  Californians pay about 60% less than Wyoming residents on their total electrical bills.

http://www.npr.org/blogs/money/2011/10/27/141766341/the-price-of-electricity-in-your-state

I could be accused of cherry picking my examples.  I freely admit that this is far from an empirical study. There are more issues to be examined, such as differing social attitudes of consumption, and whether the culture of California socially incentivizes conservation compared to Wyoming, the largest coal producer in the country.

Nonetheless, as higher energy prices, either by mandate or market become the reality, it will be exciting to see how we learn to do more with less.  In future blogs I will explore smart grid technology as a means to do just that.  Stay tuned.