Carbon: A (Nearly) Weightless Commodity

Last Thursday, California became the first state to establish a conditional standard for greenhouse gas (GHGs) emission limits – known as the cap-and-trade program. The California Air Resources Board (CARB) voted to adopt final the rules that will regulate carbon emissions across a broad cross section of the state’s economy, including oil and gas producers, utilities and transportation companies, farmers and the building industry.

The goal of the program is to decrease GHG production to 1990 levels by 2020.

Starting in 2013, CARB will give polluters an allowance of carbon credits (the amount of carbon they can emit) at the beginning of each year based on emissions reductions benchmarks. If a company doesn’t use all of its credits, it can sell them to companies that cannot, or will not, reduce their carbon levels.

This new market approach to lowering carbon emission will likely create a new industry, where firms functioning much like stockbrokerages and financial consultants will manage permit purchases and other trading tools for polluters to distribute from one to another. The Intercontinental Exchange (NYSE:ICE) powered organization Chicago Climate Exchange is such a company, being the largest and longest running carbon exchange firm in North America.

Perhaps most importantly, it will make California a model for national air pollution control. Whether this is good or bad depends on your perspective. While many businesses support what they see as an innovative approach to environmental regulations, others are becoming more vocal about how they believe costs imposed by the program – including increased electricity and gasoline prices – will drive companies out California. At the same time, there is a split among the environmental community as well. Some groups laud the market-based approach while others decry it as a distraction from more effective regulatory schemes and a strategy that unfairly benefits historically major polluters and has a checkered track record.   

According to CARB Chairwoman Mary Nichols, “Cap-and-trade is a new tool that for the first time allows us to reward companies for doing the right thing.” Time will tell whether this tool will indeed fulfill its promise to make California the leader on being climate friendly.