Is “Climate Action” just a scam to get you to pay for someone else’s carbon emissions?
Don’t fall for the Cap-and-Trade con.
The California Air Resources Board (CARB) recently released its Draft 2022 Scoping Plan for reducing statewide greenhouse gasses by at least 40% by 2030, and for achieving carbon neutrality by 2045. CARB characterizes its plan as “ambitious and aggressive … comprehensive, far reaching, and transformative …”, but the plan has been widely criticized (e.g., here and here) for not being ambitious enough. Governor Newsom recently asked the legislature to ramp up its climate goals, accelerating CARB’s 2030 emissions reduction goal from 40% to 55%.
However, simply pushing CARB to step up its game won’t be enough; a truly ambitious plan to decarbonize California’s economy at the scale and pace required for global climate stabilization will require an “all hands on deck” effort by individuals, businesses, communities, and municipalities to support and accelerate the state’s goals. Quoting from the last page of CARB’s report:
“The Draft Scoping Plan … includes aggressive assumptions about consumer adoption of ZEVs, heat pumps, and other energy efficiency practices, among others. When it comes to climate change mitigation, the sum of the parts matters. Only when we add up the impacts of the choices we make do we understand the true impact on GHG emissions. We can choose to drive a car, take a bus, bike, or walk. We can choose to install a heat pump or buy an electric cooktop. Together, we get to pick the future we want. …”
An inspiring call to arms, but there’s one big problem: If you do the math and “add up the impacts of the choices we make” you’ll find that the “the sum of the parts” totals to zero. CARB’s regulations operate to nullify the GHG impacts of such choices. Broad-based, grassroots climate action to support ambitious statewide greenhouse gas reduction goals is not possible with Cap-and-Trade, the foundation of CARB’s current regulatory system.
Cap-and-Trade and the “waterbed effect”
One of the ways you might choose to reduce your carbon footprint is by purchasing “Green Power” from your local power utility. The major California utilities all offer Green Power options, which allow ratepayers to purchase up to 100% of their electricity from renewable sources. These programs are required by the California Public Utilities Commission to be “Green-e certified” by the Center for Resource Solutions (CRS), the professed “trusted global leader in clean energy certification”.
You might reasonably expect that Green-e certification ensures that your Green Power purchases provide some environmental benefit, but the FAQ page on the Green-e website makes the following circumspect statement:
“Purchasing renewables lowers the purchaser’s carbon footprint, but may not reduce global carbon emissions.”
Whoa. Doesn’t “lowering your carbon footprint” mean reducing global carbon emissions, by definition? And why would switching from fossil fuel to renewable electricity not marginally reduce global emissions? The FAQ page does not say, but I asked CRS staff whether purchasing renewables in California would be expected to have any effect on statewide and global greenhouse gas emissions, and this is what they said:
“… in states with emissions caps in the electric sector such as California, even producing more RE [renewable energy] generation may not reduce statewide emissions, since reducing emissions in the sector will just free up allowances for others to use — allowances must be retired to affect statewide emissions in that case.”
That explanation might seem abstruse, but a brief explanation of how California’s greenhouse gas regulations work will make it clear what’s going on.
For the last decade California has been regulating statewide emissions by using Cap-and-Trade, a system of rationing emission allowance rights. CARB issues emission allowances, each of which authorizes emission of one metric ton of CO2-equivalent greenhouse gasses. The total number of allowances issued each year is set according to a predetermined statewide cap, which is reduced over time to keep the state on track to achieving its emission reduction goals. (About 80% of statewide emissions are covered by the program.) Allowances are distributed in part by free allocation and in part by auction, they can be bought and sold on the open market (that’s the “trade” part of Cap-and-Trade), and they can be banked for future use.
Imagine, hypothetically, that you are a regulated entity that receives a free allocation of ten allowances, which is sufficient to cover your annual emissions of ten tons of CO2. Suppose you take action to reduce your emissions by half, to five tons. Now you would only need to surrender five allowances to cover your emissions. What would you do with the remaining five unused allowances? You could sell them to help offset your energy investment costs. (Market prices have been trending around $30 per allowance this year, so five allowances would currently be worth about $150.) But that would be self-defeating if your objective is to reduce your carbon footprint. The only reason why those five surplus allowances have market value is that they would let someone else emit five more tons of CO2, which they would not have been allowed to emit if you had not freed up five extra allowances by reducing your emissions. If you really want your actions to provide an environmental benefit you would need to “retire” those extra allowances by permanently taking them out of the market (i.e., don’t sell them).
Of course, in the real world you are not a regulated entity and you do not own the allowances associated with your emissions. They are owned by your power utility, by local distributors of transportation fuel, and by industrial facilities (e.g., cement and steel manufacturers, etc.). If you reduce your consumption of fossil-fuel energy by an amount sufficient to reduce their emissions by five tons, do you think they are going to retire the resulting surplus allowances? No, they’re going to sell them or use them to generate five more tons of emissions somewhere else. Zero-sum game.
CARB’s Cap-and-Trade system disallows you from reducing your carbon footprint within capped sectors. Emissions from industries such as electric power are regulated by the supply of emission allowances, which is predetermined and controlled by CARB. Individual actions such as purchasing Green Power, installing energy-efficient appliances or residential PV, driving an EV, etc. do not influence either the supply of allowances or aggregate emissions in capped sectors; they merely have the effect of subsidizing somebody else’s increased emissions.
Cap-and-Trade operates to nullify the environmental benefit of all additional carbon-reduction actions in capped sectors. For example, CARB’s “Greenhouse Gas Reduction Fund” (GGRF), the repository of Cap-and-Trade auction revenue, is reported to have achieved 76 million tons of cumulative CO2 emissions reductions between 2015 and 2021. That claim is untrue.
I recently posed two questions to CARB staff about the GGRF: (1) Do GGRF investments (California Climate Investments) influence the supply of emission allowances under California’s Cap-and-Trade system? The response was “No”. (2) Do GGRF investments influence statewide emissions in capped sectors? Staff would not answer the question, although the answer should be obvious, given that statewide emissions in capped sectors are determined by the supply of allowances. This was explained in a 2016 report from the California Legislative Analyst’s Office entitled “Cap-and-Trade Revenues: Strategies to Promote Legislative Priorities”, which stated the following:
“Spending on Capped Sources Likely Has No Net Effect on Overall Emissions. … As long as the cap is limiting emissions, subsidizing an emission reduction from one capped source will simply free–up allowances for other emitters to use. The end result is a change in the sources of emissions, but no change in the overall level of emissions.”
The “Greenhouse Gas Reduction Fund” likely achieves little if any actual greenhouse gas reduction in capped sectors; it operates more as a “Compliance Cost Reduction Fund”.
A number of local jurisdictions in California such as San Diego City and Santa Clara County have initiated Climate Action Plans (CAPs) with ambitious decarbonization goals exceeding state mandates, e.g., net zero by 2035. The draft Scoping Plan says “California encourages local jurisdictions to take ambitious, coordinated climate action at the community scale; action that is consistent with, and supportive of, the state’s climate goals”. CAP administrators and personnel who I’ve talked to have all had the expectation that local climate actions would help reduce statewide and global emissions (and CARB has done nothing to disabuse them of that belief). But Cap-and-Trade nullifies the environmental benefit of such actions, as explained in a publication authored by the Chair of the Independent Emissions Market Advisory Committee (IEMAC), which advises CARB and the California legislature on climate policy. This explanation pertains to the Regional Greenhouse Gas Initiative (RGGI, a Cap-and-Trade system covering power plants in eastern states), but it is equally applicable to California:
“Additional actions may be taken by cities, states, companies, or individuals to reduce emissions associated with electricity consumption based not on the price of CO2 emissions but for other environmental reasons. These additional efforts lead to an economic benefit for all RGGI states in the form of lower allowance prices, but they do not yield additional emissions reduction benefits. We refer to this as the ‘waterbed effect.’ Reducing emissions in one place simply makes available allowances to emit CO2 in another place.”
…
“Unless demand is so low that prices are at the auction reserve price, low demand and low prices are an economic benefit with no coincident environmental benefit. This result is a manifestation of what we call the ‘waterbed effect.’ An emissions reduction effort such as investment in energy efficiency undertaken by any entity in a RGGI state will simply make more allowances available to other RGGI entities and no additional emissions reduction is realized, at least until a potential cap adjustment as part of a subsequent program review. The waterbed effect undermines the incentive for environmentally motivated cities, states, companies, and individuals to take actions to reduce emissions associated with electricity consumption as any such actions may yield no climate benefit.”
Why Cap-and-Trade?
The nullifying “waterbed effect” of Cap-and-Trade is not a “bug”; it is a “feature”. That is how it is designed to work. As a generic policy instrument, Cap-and-Trade is not intended to minimize emissions; its priority objective is to achieve a predetermined emissions target at minimum cost. The benefits of unanticipated market opportunities, whether from economic conditions, technology advances, or local and individual climate actions, are channeled toward reducing compliance costs, not toward further reducing emissions. But the policy only reduces near-term costs by “kicking the can down the road”, deferring more difficult and costly actions to the future. Cap-and-Trade is essentially a policy of procrastination and political appeasement.
Why does Cap-and-Trade favor cost reductions over emissions reductions? Because no further reduction in emissions is required: The cap guarantees attainment of a defined environmental objective, so supplemental local and individual climate actions are pointless and superfluous. That’s the fantasy; the reality is that the cap doesn’t guarantee attainment of any meaningful environmental objective, and additional climate actions by individuals, corporations, and local municipalities are undertaken to help achieve what the state government is unable to do on its own. A state regulatory policy that operates to actively undermine and nullify such actions is fundamentally flawed and irrational.
What would a truly ambitious statewide climate action plan look like?
The Draft 2022 Scoping Plan provides a concise measure of the plan’s level of ambition. At the end of the report’s Appendix H it says
“Achieving carbon neutrality in 2045 … will cost California households an average of $6 a month in income 2045.”
$6 per month, about the cost of two cups of coffee. How much would you be willing to spend personally to avert catastrophic and irreversible climate change? More than $6 per month?
That’s the price tag for one of four plan alternatives that CARB considered, which it selected as its “Proposed Scenario” (Alternative 3). One of the alternative plans that CARB rejected (Alternative 1) targeted carbon neutrality by 2035, and it had a higher projected cost of $79 per month in household income in 2035, diminishing to $45 per month in 2045. Would that price be worth paying to forestall the most severe impacts of climate change?
Suppose the cost was not incurred as a tax or “charitable contribution”, but rather as an investment, which could potentially return long-term dividends far into the future long after fossil fuels are defunct. Not an investment in piecemeal projects and technologies, but as part of a statewide or multi-state business plan for full decarbonization of the economy on a time frame that depends on how much businesses and individuals like yourself are able and willing to invest. How much would you invest?
California’s decarbonization program could be quickly ramped into high gear by (1) terminating CARB’s perverse Cap-and-Trade program, which operates by design to actively undermine and nullify complementary and independent climate actions, and (2) adopting a policy framework that empowers individuals, businesses, communities, and municipalities to influence the scale and pace of decarbonization through their collective actions and investment choices, and to reap the economic dividends accruing from their choices.
“Together, we get to pick the future we want.” But only if we (not “they”) make it happen.
[This is an abbreviated version of a longer paper posted on SSRN: “California’s Ambitious Greenhouse Gas Policies: Are They Ambitious Enough?”.]
