California's Cap-and-Trade: guest post looks at proposed economic solution to carbon pollution

Beginning in 2013, a major component of AB 32, California's climate change legislation, will commence: cap-and-trade regulations. California will lead the United States in the initiation of cap-and-trade policies and much of the country will be watching as to whether it proves to be a viable approach to stemming carbon emissions.

Cap-and-trade has it proponents, and at first blush it does seem to look good on paper. But it has its detractors, too - from businesses opposed to more government regulations to environmental groups opposed to the idea of polluters buying their way out of trouble. (Nature does not take into account a polluter's ability to pay for its own mess and then simply mitigates the negative impacts accordingly.)

One encouraging note is that, whether or not the cap-and-trade provisions of AB32 succeed and continue or fail and are discarded, the legislated overall reduction in carbon and greenhouse gas emissions will continue. At least that is what the politicians are currently saying.

Reported in the Los Angeles Times, former Governor Arnold Schwarzenegger said, "Today's adoption of a cap-and-trade program is a major milestone for California's continued leadership on reducing the world's greenhouse gases. As I said both when we signed the legislation in 2006, and when we fought to protect it last year when Texas oil companies attempted to overturn it with Proposition 23, the most critical phase in the fight against climate change is diligently, aggressively, and correctly implementing this law."

Elaine Hirsch, writer and affiliate with MastersDegree.net, a clearing house for online degree programs, has contributed the following guest post on the subject of California's cap-and-trade program. In it, she examines how cap-and-trade hopes to find an economic motivator to address an environmental issue.

Why Cap-and-Trade in California Should be Given a Chance

Scientists , policymakers, and academics have intensely argued about the validity of climate change since the late 20th century. With over seven billion humans inhabiting the Earth, the negative externalities of consuming energy and polluting the atmosphere are becoming increasingly pertinent problems. Regardless of arguments over climate change or increasing energy prices, it doesn't take a master's degree in climate science to realize that the amount of energy consumed is increasing at an unsustainable rate. Either consumption needs to be capped from excessive use or alternative resources must be found. California recently announced that it's pioneering a cap-and-trade system for carbon emissions, which will help exacerbate both problems mentioned above.

Benefits of Cap-and-Trade
Starting in 2013, California's Air Resources Board will dole out carbon credits to carbon emitters in the state. Companies can use all of their credits on emissions or buy/sell credits to others. The idea behind this system is that California will be able to control how much total emissions businesses will be able to produce as a whole, allowing the state to reduce its carbon-dioxide emissions 25% below 1990 levels by 2020. Furthermore, policymakers expect this system to become a $10 billion market by 2016. Essentially, California would be creating a market out of thin air while cleaning the state's air quality.

Although a cap-and-trade system is ultimately dictated by the state government, it retains a market approach which will please many businesspeople. Theoretically, allowing parties to dictate the costs of negative externalities is the most efficient way to find a true cost for a good. Since valuing the price of carbon is a little-researched topic, allowing businesses to essentially bid on the price will be a simple way to value the substance.

In addition to financial benefits, capping the amount of carbon emissions would act as an incentive for companies to innovate alternative energy methods. Say, if the price of a carbon credit would be too expensive for start-up companies, these companies would increase the demand for alternative energy forms such as solar, wind or nuclear. This demand would help fund initiatives for energy companies to seek cheaper alternative energy sources, creating a sustainable future for the state (and the world!).

Far From a Solution
With that said, cap-and-trade is nothing close to a panacea for our energy woes. A classic argument opposing cap-and-trade stems from disdain towards government interventions in the marketplace. Removing government intervention from markets theoretically allow businesses to most efficiently allocate their capital. Imposing the extra costs of buying carbon credits would drive up business costs and create inefficiencies for businesses.

For less free-market adherents, an alternative proposition would be a carbon tax in lieu of a cap-and-trade model. Although it would set no hard limit for how much emissions are released into the atmosphere, the state will gain tax revenue and create an incentive for businesses to find alternative energy sources to relieve taxes.

Obviously, non-believers of climate change will also be against a cap-and-trade policy. Both economists and policymakers admit that cap-and-trade would create business inefficiencies and dead-weight-losses, which will be a central focus during a time of stagnant economic growth and dismal unemployment numbers.

Hopefully, this article has illuminated many of the tangible and ideological arguments for and against a cap-and-trade system. With the cost of pollution being a hard commodity to value, implementing a cap-and-trade system in California is a great way to test how the system would work in a real-world setting. California is a large state with a vibrant economy and prominent businesses, which provides a solid framework for such a social experiment. The upside of this project would lead to less carbon emissions, higher tax revenues, and innovations in energy ideas. The downside would be an increase in government control in private enterprise and further economic stagnation. Finally, if the experiment were to fail, the costs of reversing the policy would be much less than if the United States were to reverse policy on a national level. Regardless, the entire country will be watching this social experiment, so it may be wise for both proponents and opponents to wait for the results before citing arguments based solely on economic and/or scientific models.
Elaine Hirsch, MastersDegree.net

Read more about cap-and-trade in the Los Angeles Times.
And you can read more in FastCompany.com.