My recent trip to California was not the greenest one. I went to Los Angeles where skies were blue, the parks green, the beaches long, and the traffic longer. It was a memorable trip and was a great exposure to what California offers, but as I have come to realize, it was only a taste of the diversity of people, political views, landscapes, and environmental approaches that the state has depending where one travels. Whereas Los Angeles is notorious for its traffic, smog, and horrendous pollution from the concrete jungle, the state of California is sparking headlines with its green legislation to promote and implement a Carbon ‘cap-and-trade’ system. There’s no wonder such a move is creating such a frenzy of headlines and interest. Currently, California’s market for permits of trading emissions would be second in size only to Europe (Sankin 2012). Therefore, any move the state makes within this field would have tremendous impact federally.
Still, the Cap-and-Trade system has not been without its fair share of criticisms. One NASA Scientist labeled it ‘half-baked.’ On the other hand, the California Chambers of Commerce (CCC) has called it unconstitutional because it does too much. All of this has led to an interesting set of questions surrounding the issue. First, what exactly are the mechanics behind the ‘cap-and-trade” system that California officials are implementing? And second, why has it led to disapproval from the CCC? Is it really, as the CCC’s lawsuit claims, an unconstitutional program?
What are the mechanics behind the ‘Cap-and-Trade’ system?
The actual origin of the ‘cap-and-trade’ system dates back to 2006 when the California Legislature passed Assembly Bill 32 (A.B. 32). A.B. 32 has as its mission an aim to stop global warming, which, according to the bill, “poses a serious threat to the economic well-being…and the environment of California,” and “will have detrimental effects on some of California’s largest industries including agriculture, wine, tourism…,” etc. (Pt. I, 38501 (a) (b)).The bill calls for the requirement of “monitoring and annual reporting of greenhouse gas emissions from greenhouse gas emission sources” (Pt. II, 38530 (b) (1)). In order to carry out this primary requirement, it authorizes a state board to “determine what the statewide greenhouse gas emissions level was in 1990, and approve in a public hearing, a statewide greenhouse gas emissions limit that is equivalent to that level, to be achieved by 2020” (Pt. III, 38550).
The above-mentioned provisions of the bill are themselves not the ones at controversy. It is following them, in Part V, where the beginnings of contemporary criticism can be found. In this section, the legislation calls for “market-based compliance mechanisms” in order to reach the statewide greenhouse gas emissions limit set by the state board. The workings of this ‘market-based compliance mechanism’ can be described as the following, in which the Huffington Post’s Aaron Sankin writes:
“California’s cap-and-trade program puts a cap on the level of emissions a given business is allowed to release. If a firm wants to go over that limit, it has to acquire pollution permits. These permits can be traded on the open market, giving companies an incentive to implement procedures reducing emissions so they can sell their permits and raise revenue.”
According to the New York Times, California will be handing out a set number of ‘allowances’ for Carbon Emissions for free, which is equivalent to 90% of the business’s Carbon emissions from the previous year. The other 10% will be churned into allowances that go up for auction where businesses can determine, through their own cost-benefit analysis, if it is more efficient for them to implement the technology to diminish carbon emissions to 90% of their previous year or to just buy allowances from others so they can go above their individual allowance assigned by the state (Barringer 2012). The greenhouse gas emission sources affected by this will be entities that produce greater than 25,000 Metric Tons (MT) per year.
Some individuals, such as John Miller, have asked if the cap-and-trade program is the solution to reduce U.S. carbon emissions. Though the bill is a step in the right direction, Miller argues that a 1990 target is not a significantly challenging target and that the state, between 2005 and 2009, has already lowered its CO2 emissions to within 20 Million-MT of the A.B. 32 1990 target (Miller 2012). Miller notes in criticism of the A.B. 32 that “the majority of California 2012-2010 carbon emission reductions appear to be due to the economic decline in California following the U.S. 2007-09 economic recession and not the A.B. 32 cap-and-trade program.” At first glance, this trend is fitting due to the fact that there was such a large measured decrease between 2005 and 2009, which is a period in which the recession hit.
However, given that there might be a causality issue at stake here in the statistical evidence, would not the A.B. 32 then be a significant step? Assuming that the economy improves, then the natural increase in the California economy’s Carbon emissions will be, coincidentally, ‘capped’ and forced to slow down, which is the purpose of the program in the first place. It would, theoretically, slow down the future growth rate of Carbon emissions as the economic picks up. In this light, Miller’s criticism seems unfounded.
On a national level, Miller does aptly point out that the 26 MMT reduction that did occur between 2005 and 2009 was only .05% of the total Carbon emissions by the United States in general. A national movement is no doubt the most effective way of reducing CO2 emissions, but a bill that did get passed by the house to achieve this never quite reached the Senate floor and has since been tabled indefinitely.
Is this Cap-and-Trade System Unconstitutional?
Rory Carroll and Den Levine highlight that the lawsuit brought in 2012 by the CCC essentially boils down to two complaints: (i) the cap-and-trade, which expects to raise anywhere from $500 million to $1 Billion, is an ‘unconstitutional tax’ and that A.B. 32 only allows for the state board to raise enough money for administrative costs and nothing more; and (ii) the system imposes an unfair disadvantage on companies competing with out-of-state industries.
Governor Jerry Brown has allotted $500 million in the budget for administrative costs and expects to receive an estimated $1 Billion, which he then claims is not a tax because all money made beyond the administrative costs will then be reinvested into green energy programs and different existing Greenhouse Gas emission project (Miller 2012). The governor has yet to hammer out the details of this transfer of funds. Those in accordance with the views of the CCC are skeptical that the California government will properly be able to replace existing expenditures with the new revenue raised without technical problems or spill-overs of funds. Should any of these problems arise, then critics argue that the A.B. 32 would need to be viewed as a tax, which would not be a legal tax since any tax needs to have had at least two-thirds supermajority, which the bill did not have when approved by the legislature in 2006.
Legal Planet blog’s Rhead Enion counter-argues that such a system is not a tax because the allowances represent a state-governed entity (i.e. treatment of the state’s environment) that is then “sold to industry participants at fair market value.” To be put more generally, this is not a tax because companies in the auction are participating in a fairly valued free market regulated by a state entity, in which each state voluntarily purchases permits to produce a certain amount of pollution. If it chooses not to buy the permit, then it makes the technological changes to meet state standards otherwise.
Conclusion
The California cap-and-trade system serves for a fascinating case-study on the state-by-state implementation of environmental reform within the United States. Critics are shaky in regards to their argument of whether or not A.B. 32 constitutes a tax, but individuals from both sides acknowledge the costs by being the first state to fully implement a cap-and-trade system. Still, it is a step in the right direction that the federal level is too divided to properly handle. If the companies do not like it, there is always a cost-benefit analysis to whether or not moving to a place like Texas might be more cost-effective, but then you’d have to give up living in California. And we don’t want that now, or do we?
For statistics behind AB 32 and the cap-and-trade system, please check out the following summary by the Center for Climate and Energy Solutions.
Thanks for reading,
P. Anthony Arias
January 8, 2013
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