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Climate ChangeCap and Trade Heats Up—For Higher or Worse

Cap and Trade Heats Up—For Higher or Worse

Cap and Trade Heats Up—For Higher or Worse

Prices are high and markets are proliferating as program designers lean away from the more controversial elements of carbon trading.

This past 12 months has been big for cap-and-trade-style systems, and that momentum looks prefer it’s continuing in 2023. Recently, we’ve seen latest programs initiate in Oregon and Washington, a proposal in Latest York State for brand spanking new carbon markets, and sustained high prices in existing programs in California and the Northeast. Although these programs differ of their details, all of them attempt to scale back greenhouse-gas emissions cost-effectively by making a marketplace for permissions to emit—called “allowances”—subject to an overall cap on the quantity of aggregate emissions allowed. So let’s take a fast have a look at these developments, and the way latest programs are responding to among the most pressing concerns with emissions trading.

High Prices and Latest Programs

Washington’s “Cap and Invest” program launched this 12 months, and Oregon’s “Climate Protection Program” issued its first allowances in March 2022, joining the three existing U.S. cap-and-trade programs: California’s, Massachusetts’, and the multistate Regional Greenhouse Gas Initiative, or “RGGI”. (Oregon’s program is a little bit different from the others: it covers fuel suppliers, but not power plants or industrial emitters, and all its allowances are given totally free to covered suppliers, not auctioned off.)

Latest York, whose power suppliers already take part in RGGI, can also be seriously considering starting its own carbon market. In December, the state released a roadmap for climate policy that included a “Cap-and-Invest” program, and in January Gov. Kathy Hochul proposed laws that will give state agencies the ability to make it real.

Meanwhile, allowance prices—one indicator of a carbon market’s efficacy—have remained consistently high. California’s allowance-auction prices, which had been at or near the regulatory minimum for much of the lifetime of this system, began rising markedly in mid-2021 and have been over $25 since. Prices for RGGI allowances shot up through the same period, triggering the discharge of additional allowances to slow price growth. A small cap-and-trade program for power plants in Massachusetts likewise has seen high prices recently, although those are more volatile. And Washington’s first auction beat all of those, clearing at $48.50, well above its floor price of $22.20.

Data from RGGI, CARB, MassDEP, Wash. Dept. of Ecol., EDF

Evolving Policy Approaches

Meanwhile, policymakers appear to be adjusting the cap-and-trade model to account for—or evade—criticism. For one, they’ve stopped calling it “Cap and Trade”: each Washington and Latest York call their programs “Cap and Invest” as an alternative. This appears to be purely superficial, since Washington’s program still allows for allowance trading, and Latest York’s program presumably will, too. (And, for that matter, California’s cap-and-trade program features a major investment program.)

Still, emphasizing the funding that allowance auctions can provide to other projects, and minimizing the role of the market, reflects a growing concern with the criticism levied against carbon markets. Some environmental-justice advocates criticize market-based approaches for allowing polluters to come to a decision whether—and where—to chop emissions; since local air pollutants are sometimes emitted alongside climate pollutants, allowing emitters this flexibility makes it possible for them to take care of and even worsen the intense racial and economic inequities in pollutant burdens that exist already (the info on that is sparse and complex by the proven fact that cap-and-trade programs are likely to be paired with other programs, making the impact of anyone program unclear). One response to those concerns by carbon-market proponents has been to make use of the funds generated by the carbon market to speculate more in frontline communities: each Washington and Latest York have these requirements, and Latest York’s plan is being pitched as a method to generate funds for “communities with particular needs.” Similarly, in California, this is completed through a set-aside for overburdened and “low income” communities (I’ll be explaining those scare quotes in an upcoming post in my series on income-targeted environmental policies).

One other major shift within the newer carbon markets is reducing the role of the choice compliance options referred to as “offsets.” Offsets are alleged to be a way for businesses in a carbon market to get credit for projects that reduce emissions outside the scope of the market. But recent scrutiny of offset projects in California’s market—extending a 2021 debate—have raised serious concerns that they are usually not actually achieving the extent of emissions reductions that they claim. And since offsets allow much more flexibility in where emissions reductions—and the accompanying local advantages—occur, they’re seen as a part of carbon markets’ equity problem.

That could be why Oregon, Washington, and Latest York are limiting the role of offsets of their carbon markets. Washington’s program allows for offsets as normal, but reduces the statewide cap on greenhouse-gas emissions by an amount equal to the variety of offsets utilized by market participants, to stop offsets from weakening the state’s climate goals. Oregon replaces offsets with “community climate investments,” which have a direct price-to-credit ratio (currently $123 per credit), avoiding the problem of attempting to measure the quantity of emissions reductions achieved by a selected project. And Latest York may eliminate the usage of offsets altogether: the state’s Scoping Plan noted that “the role of offsets would need to be strictly limited and even prohibited” to comply with state law, and Gov. Hochul’s office has said that her plan “is not going to allow the usage of offsets that would allow high-emitting sources to proceed to pollute.”

Alternatively, California policymakers argue that offsets are a crucial a part of their cap-and-trade regime, each because they reduce the associated fee of this system by offering a less expensive alternative to allowances and since they encourage greenhouse-gas reductions in latest and emerging areas. The turn away from offsets in Oregon and Washington (and, possibly, Latest York) may due to this fact be a useful experiment in policy design.

The Way forward for Carbon Markets?

The rollout of cap-and-trade programs within the U.S. has been slow and difficult. But because the inevitability of major climate policy becomes clear, regulators look to carbon markets to complement other programs, and even regulated industries are starting to see them as an alternative choice to stricter requirements. In that sense, it’s a very good thing that carbon markets are each getting some bite—in the shape of upper allowance prices—and that policymakers are learning from the past. However the equity concerns raised by carbon markets remain serious, and neither changing the name nor eliminating offsets is enough: Any state that opts for an emissions-trading system must pair it with stringent and sustained reductions in local environmental harms, targeted on the areas which are probably the most overburdened.

cap-and-trade, Climate Change, states


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