California Carbon Trading Enjoys Success While Europe’s Trading Program Teeters On The Brink Of Failure

February 17, 2013

Saturday, February 16, 2013 by Lev Gabrilovich
California’s cap-and-trade program has recently passed its first real test with flying colors. Through this program, California is able to reduce pollution by setting a maximum cap on emissions in the state. Then, the state, through the California Air Resources Board (“CARB”), sets up permits for emissions allowances, which are allocated amongst emitters. These emitters either pollute, or reduce their pollution impact and sell their allowances to other emitters. The benefit of the cap-and-trade system is that it allows relatively free market allocation of allowances, providing for an efficient distribution of pollution rights. CARB decided to initially allocate the allowances through an auction system, which will not only allow the market to set the allocation, but also set the price of the emissions credits. More importantly, this system creates a financial incentive to reduce carbon emissions and should increase low-emission technology development.
CARB had its first credit auction this past November, and credit system advocates and prospective investors should be pleasantly surprised at its success. While the credits were traded only slightly above the minimum price, all of the credits were successfully sold, including a significant portion of the credits for the next year. Twenty-three million allowances were sold, and two hundred and thirty million dollars of revenue was generated for California, which will be used for other environmental projects.
This success can be contrasted with the potential failure of the older and more established trading system in Europe. A glut of credits in Europe has dropped the price of emissions allowances well below the necessary price incentivize the market for capital investment in low emissions technology. Many economists blame this low price on too many credits being issued, without consideration of a possible economic downturn, such as the one Europe experienced these past few years. The European Emissions Trading System is now trying to remove nine hundred million credits from the market, in the hope of raising the credit price.
California may have been successful in selling credits, but the credit price is dangerously low. The credits sold at $10.09, just above the $10 minimum price. While the full and enthusiastic sale certainly makes credits scarce enough to be a viable commodity, the low price could put the California market at risk in any new economic downturns. The real test of the California market will be whether the popularity of the carbon market will drive up the price of the credits.