Is cap-and-trade working? So far

California’s new budget includes $832 million that will go toward high-speed rail, public transit, energy efficiency, and other projects to support low-carbon, sustainable communities. This money is from a new source: The California Cap and Trade Program, which requires industrial firms — responsible for 20% of statewide greenhouse gas emissions — to reduce emissions or buy allowances to cover them.

So, while the program is certainly generating revenue for the state, is it working?

Knowing that the Cap and Trade Program is on track means that California policymakers can turn to a new question: How to reduce emissions at the lowest cost possible to businesses and the state?

Eighteen months in, it appears the answer is yes. Firms affected by the requirements say that they are paying attention to it, that they believe it’s here to stay, and that it’s prompted them to look at ways to reduce emissions. In recent interviews with cement industry stakeholders we learned that companies are factoring the carbon price into their analysis of investment opportunities. And with the help of the carbon price, there are several new opportunities for these companies to reduce emissions while saving money.

This is all good news for California. Under newly proposed federal regulation, states will soon need to develop new strategies for reducing greenhouse gas emissions. But California is already far ahead of the pack — it’s had an emissions reduction plan since passing AB32, the Global Warming Solutions Act that authorized the Cap and Trade Program, in 2006.

Knowing that the Cap and Trade Program is on track means that California policymakers can turn to a new question: How to reduce emissions at the lowest cost possible to businesses and the state?

We took on this question in a recent report, “Cap and Trade in Practice,” focusing on the cement industry, which is California’s largest industrial emitter after oil and gas, as well as the largest consumer of coal in the state. We found that while the carbon price is providing many opportunities to reduce emissions while saving money, it isn’t the only thing firms think about when making decisions. Companies must consider a host of other factors that the carbon price does not address. This means that to achieve some of the lowest cost emissions reductions, policymakers may need to think beyond cap and trade. AB32 does some of this by targeting electricity, transportation, and other parts of the economy, but policymakers could do more.

California can help accelerate this transition by investing in the development and commercialization of alternative fuels

For example, while most energy efficiency investments eventually pay for themselves through reduced fuel costs, many companies say they will not invest unless a project can recoup its upfront cost within just a few years, which puts many efficiency projects out of reach even with a carbon price. Rebates and incentives can help make these projects more attractive to companies and could be paid for through Cap and Trade auction revenues. And there are also initiatives underway to encourage companies to take a longer-term view of their finances, including the Environmental Defense Fund’s Climate Corps program.

Switching to lower-carbon fuels also faces challenges that the carbon price alone does not solve. While fuel switching offers some of the most promising options for emissions reductions in the cement industry, cement firms need more certainty that alternative fuels will be available at predictable prices in the future. California can help accelerate this transition by investing in the development and commercialization of alternative fuels.

Finally, while blending lower-carbon materials into cement can be an attractive emissions reduction option and one widely (and safely) used in Europe, prescriptive codes and standards and entrenched customer purchasing practices mean firms are limited in what they can do. A range of initiatives across government agencies couldincrease blending of alternative materials, such as changes in purchasing practices by Caltrans and other large customers, customer education programs, initiatives to influence standard-setting processes, and collaborative research efforts between government and industry.

Other industries likely also face similar situations — the state should address barriers to reducing emissions at lowest cost across these major industries.

Thanks to the Cap and Trade Program and other climate policies, California is well placed to meet its emissions reduction target under the EPA’s Clean Power Plan, and already on track to help businesses take advantage of many low-cost or even money-making emissions reductions. But to get to the next step, it may mean thinking outside the carbon price to other policies that don’t necessarily cost much, but can mean big savings for some of California’s key industries. Let’s keep California ahead of the pack when it comes to climate and when it comes to business.
—
Ed’s Note: Julia Zuckerman is an analyst at Climate Policy Initiative (CPI) in San Francisco, which works to improve energy policies around the world and has a particular focus on how policy aligns with business and finance.