State should look beyond cap and trade to develop more effective climate policies

California’s cap-and-trade scheme is in trouble. The latest carbon auction announced Aug. 23 failed to sell two-thirds of the available pollution permits, a third successive flop. That could leave a significant funding gap for other climate measures, such as weatherizing old homes, which are supposed to be paid for by revenue from these state-run auctions.

Tying the fate of important climate actions to the sale of carbon permits has snatched defeat from the jaws of a broader victory in reducing greenhouse gas emissions.

And in a further blow to the credibility of cap and trade, it is regulations such as fuel-emission standards rather than the carbon market that is helping California meet its climate targets. In fact, perversely those same regulations are undermining the cap-and-trade market as they reduce the price of carbon by suppressing demand for the permits. California is bizarrely confronting the greatest challenge humanity has ever faced with policies that work against each other.

Contradictions between cap and trade and other, more successful climate policies have appeared wherever carbon trading has been tried.

The European Union Emissions Trading System, the world’s largest and longest-running carbon market, provides a good example. Too many pollution permits were made available as a result of special pleading from industry lobbyists and the price collapsed. Since its launch in 2005, the price has never been sufficient to encourage the ambitious policies needed to convert the EU to a lower-carbon emitting region.

Cheerleaders for the Emissions Trading System point to the fact that overall emissions are down, but a closer look at the economics shows that this has little to do with cap and trade. The EU’s extended economic slump, alongside the positive effects of renewables and energy efficiency targets, are the key factors.

Yet instead of extending climate and energy targets that have proved successful, lobbyists are now using the low-carbon price to pressure EU policymakers to weaken effective regulation. The EU’s post-2020 renewables targets have consequently been gutted, while its new energy efficiency target merely reflects existing practice.

These failings have been compounded by the use of international carbon offsets, which are gradually being phased out in Europe but could be replicated here.

Carbon offsets – in which polluters buy largely theoretical carbon reductions elsewhere in order to continue polluting – have been beset by controversy over their effectiveness. Many of the EU offsets suffered a “total lack of environmental integrity,” as the EU’s top climate diplomat later admitted.

Offsets also raise social justice concerns as they adversely affect low-income communities living in pollution hotspots in industrialized nations, as well as marginalized communities in developing countries whose lands and livelihoods are often seized in the name of conservation.

Some will point to the fact that carbon auctions generate revenue that can be used for high-speed rail, electric vehicles and even local climate plans. But the repeated failure to sell a majority of pollution permits shows that carbon auctions are not up to the task.

Investment requires certainty, but carbon markets are volatile by nature. Carbon is an odd commodity, the supply of which is subject to government decisions that can be swayed by court cases and corporate lobbyists. Carbon taxes, by contrast, pay a predictable – and generally rising – fee for pollution.

The legal uncertainty surrounding the future of cap and trade, particularly beyond 2020, offers an opportunity to develop more effective climate policies. Instead of doubling down on carbon trading, California should now be looking to tighter performance standards and emissions limits, while at the same time developing a carbon tax or reaching into state budgets to fund programs that will help local economies make the transition to a post-carbon age.

Oscar Reyes is an associate fellow of the Institute for Policy Studies, working for its climate policy program.