Why CA carbon auction and overall AB 32 approach are doomed

Why CA carbon auction and overall AB 32 approach are doomed

ab32This month marks the seventh anniversary of Arnold Schwarzenegger signing AB 32 amid an orgy of self-congratulation over this alleged environmental landmark. Ever since then, I’ve written regularly about the basic flaw of AB 32: reducing the emissions believed to cause global warming with a cap-and-trade market of pollution credits only works if most of the world follows the same approach. A single state, even California, can’t change anything on the margins.

This is not right-wing agitprop. This is basic economics. So AB 32 is bad policy because it can’t achieve its main goal, and it looks even worse when you realize that by forcing California to shift to cheaper but costlier energy, it creates an economic disadvantage with rival states and nations that don’t have AB 32-type laws in place. In other words, most of the world.

But it wasn’t until March of this year that the Los Angeles Times finally admitted concerns about AB 32’s downside were legit, not Texas-style insanity. However, this is still far from conventional wisdom. It is a pathetic commentary on California’s media that a history professor at an obscure New York college is more likely to detail the flaws of the Golden State’s approach than the reporters who regularly write about the state’s economy and its famous environmental law.

The ‘underlying flaw’ that’s obvious to outside observers

“The price of carbon in California hit its lowest point this year at the most recent quarterly auction of emissions allowances. The price per metric ton of carbon was lower than expected, down 13 percent from the last auction in May. As Bloomberg reports, the low price was likely due to California’s stated plan to give away permits for free to avoid harming struggling industries . …

“So what does this mean? One green blogger sees the auction in a positive light, pointing to the fact that all available credits were sold as a sign of the market’s health. But the drop in the price of carbon must be worrying to state regulators. They have to be aware of the fact that in Europe, the price of carbon plummeted due to over-allocation of permits. Europe’s carbon market is currently broken because planners are wary of the effect a high price might have on energy-intensive industry. And that’s the fundamental problem with carbon markets: if the price is too low, companies lose the incentive to curb emissions, but if it’s too high, many companies will simply up and move to a location where they don’t have to pay for carbon.

“California is trying to walk that line, and so far it’s in better shape than Europe. But there’s little reason to expect California’s greens will find the solution to that underlying flaw.”

That’s Bard College’s Walter Russell Mead on his superb blog. One thing that may not be apparent to Mead from his Hudson River campus is that many, perhaps most, California’s greens have no idea that there is an “underlying flaw” to the Golden State’s approach. It’s rarely pointed out by the green cheerleaders who masquerade as impartial reporters in too many of our newsrooms.

Great, just great.

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