The California Air Resources Board today is expected to approve the most disputed and litigated element of California's climate crusade – a cap-and-trade system for reducing greenhouse gases.

With this action, California will be the first state in the nation to limit emissions linked to global warming that spring from electric utilities, the transportation sector, major manufacturers and other industries. It also will be the first to establish a trading system so businesses can consider what options are most cost-effective in reducing emissions.

Cap and trade is just one tool the board is using to bring greenhouse gases to 1990 levels by 2020. Its "clean cars" program, now adopted on a national level, is a big part of the overall strategy, along with investments in energy efficiency and alternative fuels. But the cap-and-trade system is getting all the attention, and for good reason.

If California gets this right, it could serve as a model for other states and nations to transition away from coal, petroleum and other polluting fuels. If we get it wrong, it could set back the larger worldwide effort.

Cap and trade is complex, and it comes with a mixed record. It worked well in reducing acid rain emissions in the Northeast, but was initially bungled overseas when a consortium of European countries attempted to use it to reduce greenhouse emissions.

One thing is certain: California's cap will fall hardest on refineries and other industries that use the most energy for the smallest amount of output. Under the trading system that launches in 2012, they will have two main choices. They could invest in greater efficiency. Alternately, they could buy "allowances" from industries that could more cheaply reduce emissions. These allowances would fluctuate in cost, based on supply and demand.

Critics of cap and trade – who range from deniers of climate change to supporters of traditional environmental regulation – say the experiment will be disastrous. Some fear the emissions reductions will be illusory. Other fear that Wall Street traders will game the system, much like Enron did when California deregulated its electricity markets. This, in turn, could drive up the price of carbon, raising electricity rates and putting the state at the mercy of out-of-state scammers.

Air Resources Board Chair Mary Nichols acknowledges risks, but says the air board has put in place safeguards to prevent collusion, price manipulation and other forms of gaming. The state, for instance, plans to limit the number of allowances any trader can hold at one time. Under penalty of perjury, traders must fully disclose any associations with entities subject to the statewide cap.

This editorial board supported cap and trade when lawmakers approved Assembly Bill 32 in 2006, optimistic at the time that such a market-based system would be adopted in some form on a national or regional level. That hasn't happened, which gives us some trepidation.

Is California large enough to create a robust market for emissions trading? And are its regulators and industries savvy enough to spot manipulators? That remains to be seen.

All that said, a well-designed state system of emissions trading could go a long way toward easing the concerns of U.S. utilities and industries that have so far bottled up federal climate change legislation.

California lawmakers and the Legislative Analyst's Office will need to provide steady oversight to ensure that the air board has got it right and makes the inevitable adjustments. Yet by rejecting Proposition 23 last year, California voters made clear they want the state to take some risks to reap the rewards of leading the world toward a cleaner economy. Cap and trade, it appears, will be part of those risks.

The Bee's past stands

"Cap and trade isn't a cure-all. It will take a mix of rules, fees, incentives and collaborations to make a real dent in emissions that are warming the atmosphere. But it's an important tool in the tool kit."

– March 28, 2008

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