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California’s cap-and-trade program is costly, controversial. But how does it work?


Californians pay more for gasoline – and food, cement and other goods – to finance the state’s fight against climate change. They’ll continue doing so at least through 2030, thanks to a landmark bill extends California’s cap-and-trade program for another decade. Gov. Jerry Brown was able to push the bill through the Legislature late Monday.

First launched in late 2012, cap and trade is a market-based mechanism designed to discourage industrial companies from spewing greenhouse gases, while allowing them a fair amount of flexibility in how they comply with the state’s climate change regulations. It’s also very complicated, and has critics on both the left and the right.

A look at cap and trade and how it affects California’s economy:

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Q: How does cap and trade work?

A: Hundreds of industrial firms – cement makers, food processors and others – must get emissions allowances to send carbon into the air. The state hands out most of the permits for free. Companies that need additional permits have to go buy them, either from other companies with permits to spare, or from auctions held every three months by the California Air Resources Board.

Q: If companies can simply buy more permits, how does this reduce carbon emissions?

A: Because the total volume of available permits – the “cap” in cap and trade – declines slightly each year. That raises the price for each permit, giving companies a financial incentive to reduce their emissions. State officials believe some companies will retrofit their smokestacks rather than buy more permits.

Q: Is it working?

A: Sort of. Greenhouse gas emissions in California fell by 1.5 percent in 2015, the latest data available. But analysts say other, lesser-known programs are the main reason why. They include a rule requiring electric utilities to use solar, wind and other renewable sources of power in ever-increasing amounts. Prices for the carbon emissions permits have remained relatively low, and cap and trade has played a smaller role in reining in carbon emissions.

Q: So why all the fuss this week? Why was Brown so adamant on extending cap and trade through 2030?

A: In part because he’s emerged as a global leader on climate change, particularly with President Donald Trump pulling out of the Paris climate accord. But it’s also because experts believe cap and trade, which was due to expire in 2020, will become a bigger factor in curbing greenhouse gases over the next decade than it has so far. California is committed to cutting carbon emissions another 40 percent by 2030, a pretty ambitious goal, and analysts believe emissions permit prices will climb so high that they will make companies get more serious about reducing their carbon footprint.

Q: So how much is this costing?

A: Emissions permits currently cost around $14 for every ton of carbon emitted. Companies have spent around $5 billion combined at the state-run auctions since 2012. Analysts say cap and trade has added 11 cents a gallon to the price of gasoline, and could add another 20 cents by 2030.

Q: Why am I paying more for gasoline? I’ve never bought emissions permits.

A: True, but since 2015 the state’s fuel wholesalers have been required to participate in cap and trade. They pass their costs on at the pump.

Q: What do businesses think of cap and trade?

A: They don’t especially like it. The California Chamber of Commerce sued to block the state-run auctions. Its argument: The auctions are a tax, and the original legislation in 2006 authorizing cap and trade didn’t pass with the two-thirds supermajority needed for new taxes. The courts threw out the case, saying the auctions represent a fee, not a tax. But the chamber supported Monday’s legislation, in part because Brown threw in some tax breaks, and the governor secured a two-thirds vote to ward off another lawsuit. Nonetheless, only a handful of Republicans in the Legislature went along with it despite the endorsements from the chamber and some other business groups.

Q: Are environmentalists happy to see the program extended?

A: Most mainstream environmental groups supported the extension. But some environmentalists hate cap and trade because of the flexibility it offers. Although the statewide cap on carbon emissions declines each year, individual companies can continue business as usual if they’re willing to pay for the permits. They’re even allowed, up to a point, to “offset” some of their carbon emissions by investing in forestry projects and programs like that. Because many smokestack industries are clustered in poorer communities – think of the oil refineries in the industrial areas of the East Bay – some advocates say California’s effort to rein in pollution isn’t helping low-income residents.


Dale Kasler: 916-321-1066, @dakasler

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