This is not a Jeopardy question. Unfortunately, it is a question far too many political junkies have asked me lately, and a question most other people have no desire to ask. “Wasn’t cap and trade defeated?” It is dead for the moment at the national level, but is alive and well in California. Authorized by AB 32, the Global Warming Final Solutions Act of 2006, the California Air Resources Board (CARB) approved a Cap and Trade scheme for California just before Christmas in December, 2011. While AB 32 says that it will go into effect on January 1, 2012, CARB has stated that they won’t start measuring carbon emissions until January 1, 2013, though it isn’t clear how they found the authority to ignore the specific instruction in the code that it begin on January 1, 2012 (see §38562(a)).
Simply stated, Cap and Trade is a scheme to charge businesses for their production of “GHGs” – Green House Gasses – most notably, carbon dioxide (CO2). (Yes, that is the same stuff that comes out of your mouth every time you exhale.) Once you hire a translator to cut through all the regulator speak, the process will probably look something like this.
Joe business owner runs a small paper mill and he’ll be getting a letter from CARB that will say “Hi, we’re CARB, and we think you produced 100 tons of CO2 last year, so here are carbon credits for 90 tons (90% of what you need). At the end of the year, you must tell us exactly how much CO2 you emitted and deliver us carbon credits for the full amount. You can either buy those extra credits from other people on the open market who are selling them, or you can buy them from us at a carbon credit auction we are going to hold on November 14, 2012. By the way, we will be selling fewer credits than everyone needs, so bring your checkbook because they go to the highest bidder. Good luck with that. Thanks for trying to make money in California.”
The November 14 date for the first carbon credit auction is real, though CARB is graciously giving lots of people a pass. It used to be August 15, but CARB recently pushed it back. Jerry Brown has already publicly stated that he expects to raise $1 billion from the first auction, and CARB is expecting to hold quarterly auctions after that.
So who are the sellers of carbon credits other than the state? Businesses who produced CO2 last year, and will be producing less than their 90% allocation this year. Every year after that, the cap will keep going down, so they will have to continue to reduce their carbon emissions, or buy more credits. CARB thinks these reductions will happen because businesses get more efficient and find a way to do the same amount of business but produce less carbon, or because people will spend the millions of dollars necessary to design and install CO2 filtering systems, but the reality is much different. Most CO2 reductions will probably happen because the market is depressed and like everyone else, business is down. The real problem is that businesses will decide that they weren’t making that much profit at the end of the day anyway, so they might as well close their factory in California and move to Arizona. Then they will be able to produce lots of carbon emissions without a penalty, and make a fortune selling their carbon credits to those California companies who choose to stay.
Who will be impacted? The people who lose their jobs when production cuts back or moves out of state. You will suffer with higher gas prices at the pump (Ethanol production is one of the largest biological producers of CO2) and on your electric bill (virtually all energy producers and importers are on the top of the list). The phase in is rolling over the next few years, but eventually it will hit everyone. At the outset, it includes lots of people you expect like oil production and refining, chemical plants, etc., but it also includes many people you wouldn’t expect. Vineyards, cheese making, beer brewing, paper production, clothing makers, airports, and fruit and vegetable canning. The list of covered entities is massive.
Cap and Trade may have been intended as a market based way to make people clean the environment, but it has turned into a horrible nightmare. We are no longer talking about controlling pollutants, we are talking about strangling our entire economy. CO2 is what plants need to grow and what you exhale every breath. Even if you believe that reducing CO2 is an admirable goal, taxing California businesses out of existence will not do it. The businesses will move out of state and truck their products in, causing the same amount of CO2 release plus the true pollution from trucks and traffic on our highways. California businesses should not be forced to bear the weight of the world. California Cap and Trade must be stopped.