ALMOST NO ONE is talking about it, but California Gov. Jerry Brown (D) signed a hugely consequential bill this month. The law, SB 32, drastically ramps up the state’s landmark climate change law in the world’s sixth-largest economy. The world is watching closely: If California’s policy appears to be working, it will be copied in states and countries across the globe. Which makes it all the more important for state leaders to get it right.
California is well on its way to meeting its first emissions goal, set a decade ago, to cut the state’s carbon footprint to 1990 levels by 2020. That transition has been driven in part by traditional, command-and-control environmental regulations and in part by a statewide cap-and-trade system, which makes polluters pay for the emissions they produce. Despite some early doomsaying, this hybrid policy has not smashed the California economy. In fact, the state’s economy has grown faster than the rest of the country’s in recent years, as have wages. So far, the state’s experience appears to show that a major economy can transition off carbon dioxide without destroying its economic prospects.
The state’s new target, however, is to reduce carbon dioxide emissions by 40 percent below 1990 levels by 2030, which is dramatically more ambitious. The state is doing relatively easy things now. Experts warn that the deeper the cuts go, the harder and more expensive they become. Which means it is all the more important that the flaws in the policy be ironed out in coming years.
Though California’s approach is multifaceted, it really only requires one major element — the cap-and-trade system. This policy puts a hard ceiling on statewide carbon dioxide emissions and requires polluters to buy permits to emit greenhouse gases under that cap. The effect is to create a market for pollution credits and a price on carbon dioxide emissions. The price signal nudges companies and consumers to cut waste, invest in cleaner infrastructure, buy products that are friendlier to the environment and develop green technologies. Environmental considerations are now baked into the price of goods and services, which means that market forces, not regulators, determine how to green the economy. The policy is cheaper and more flexible than direct regulation.
Other supposedly complementary state policies, such as mandates regarding renewable energy or transportation fuels, are, in fact, superfluous. The cap-and-trade program already sets a statewide emissions limit; additional regulations requiring that the state meet its carbon goals in particular ways are likely to raise costs for little additional benefit. As the state ramps up its ambition, it should rely more on its carbon market than on its carbon mandates.
Other states, meanwhile, should do the same. If President Obama’s Clean Power Plan clears the courts, each state will have to create an emissions-reduction program of some kind. The Obama administration’s plan would allow states to band together and create cross-state carbon markets, which would be by far the most efficient approach. The larger the market, the cheaper the policy.
California has already merged its carbon trading system with Quebec’s. That market should get larger, and soon.