Friday, September 2, 2016

Prof. Ethan Elkind: Improving California’s Cap-And-Trade Program


California has been reluctantly going it alone with cap-and-trade, ever since the proposed federal version died in the early days of the Obama Administration.  While the state has done a good job (in my view) of developing rules that limit market manipulation and failure, the program is not without its flaws.

As state leaders consider extending the program beyond 2020, Severin Bornstein [right] at the Energy Institute at Haas, UC Berkeley, argues, based on a paper he co-wrote, that the program suffers from lack of effectiveness:
Before committing to a post-2020 plan, however, policymakers must understand why the cap-and-trade program thus far has been a disappointment, yielding allowance prices at the administrative price floor and having little impact on total state GHG emissions.  California’s price is a little below $13/ton, which translates to about 13 cents per gallon at the gas pump and raises electricity prices by less than one cent per kilowatt-hour.
While policy makers have argued that the low allowance prices just mean that other carbon-fighting programs must be successful, Bornstein begs to differ and offers some important recommendations:
So, can California’s cap-and-trade program be saved? Yes. But it will require moderating the view that there is one single emissions target that the state must hit. Instead, the program should be revised to have a price floor that is substantially higher than the current level, which is so low that it does not significantly change the behavior of emitters.   And the program should have a credible price ceiling at a level that won’t trigger a political crisis.  The current program has a small buffer of allowances that can be released at high prices, but would have still risked skyrocketing prices if California’s economy had experienced more robust growth.
The program is complicated and not nearly as elegant as a straightforward carbon tax would be. But it’s worth trying to get the details right, in case cap-and-trade can function as a viable alternative for tax-averse jurisdictions who want to decarbonize their economy. In that spirit, I hope Bornstein and his colleagues’ advice is well-taken by state leaders, as they work to improve the program.


(Source: http://www.ethanelkind.com/improving-californias-cap-and-trade-program/)

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