Industry Market Trends

California's Carbon Cap-and-Trade Will Hurt Manufacturing in the State

Sep 28, 2012


For a long time, critics of carbon cap-and-trade schemes have charged that they are simply another tax gussied up in environmentally conscious dress. The state of California, always at the forefront of green laws, will soon initiate such a scheme as part of the climate-change law AB32, signed in 2006 and described as a "landmark greenhouse gas emissions law" by the Associated Press. Critics of the cap-and-trade program, including oil refiners and manufacturers, say it would impose "enormous costs on businesses at a time when the state's economy is sputtering."

Proponents of the program say it will raise $1 billion from about 500 businesses in the state. The program particularly will raise costs for carbon-emission-producing businesses, which will, of course, pass the higher costs on to consumers -- as government taxes always are. The California Air Resources Board (it avoids the acronym "CARB," using "ARB" instead) is in charge of the program.

Companies in California will also be permitted to buy offsets for their carbon emissions. As the AP noted, "A company can also meet up to 8 percent of its emissions reduction obligations by purchasing carbon offsets, or investments in forestry or other projects that reduce greenhouse gases." Basically, the state will call it even if a company helps contribute to planting an "x" amount of trees for emitting a "y" amount of carbon.

It is hard to deny that California's economy is sputtering. It is also hard to deny that laying heavy burdens on businesses is not a way to get them doing business. But perhaps the worst part of the plan for businesses is the fact that the cap-and-trade will become more stringent over time.

In the cap-and-trade scheme, companies will be allowed to put a certain amount of carbon dioxide emissions in to the air. That amount is called an "allowance," and companies will buy those allowances from the state government. The allowances will be "capped" at a certain amount.

The AP report noted:

For the first two years of the program, businesses will receive 90 percent of their allowances for free, with the free amount and the cap declining over time. [ARB] has estimated that businesses will pay $964 million in allowances in fiscal year 2012-2013.

The "trade" part of cap-and trade works like this: If a company has, say, 100 allotments of something and it has used only 75, it has 25 allotments left over. It can put them on the market for other companies, which might have used up their allotments, to purchase.

The idea behind California's carbon cap-and-trade program is to keep the state's total carbon output at a capped level but to allow some swapping around as to who puts out what levels of that total, under the principle that carbon dioxide emissions are fungible.

ARB Chairman Mary Nichols explained to AP that some of the allowances will be sold at auction, which she described as "an efficient and equitable way to discover the actual value of a ton of carbon - and to create an incentive for those who can reduce it more cheaply than the allowance price to invest in the technologies to do so."

The state government believes that this will spur massive reductions in carbon emissions, especially as the allowable total limit gets squeezed smaller and smaller in upcoming years.

"What a cap-and-trade tries to accomplish is the most cost-effective way to achieve emissions reductions," Eric Klein, a senior broker with the New York office of the emissions trading company TFS Green, recently told Discover magazine. "Over the course of the year, if you emit above and beyond the amount covered by your permits, it's your responsibility to buy more of them on the open market. If you emit less than your limit, you can sell your extras on the open market."

The California government's publicly stated rationale for the cap-and-trade program is that it "encourages" business to "invest" in ways to reduce carbon emissions. Its thinking is that if a company is financially penalized for polluting the air, it will, logically, find ways not to pollute the air.

We know companies can find other ways not to emit carbon dioxide into California's air; one of them is by moving their manufacturing plants -- and jobs -- to Nevada or Arizona. Not building any production plants in California would be a surefire way to avoid paying for the permission to produce carbon dioxide.

California's manufacturers fear that the scheme sends the message that the state is an unwelcome place for manufacturing.

Dorothy Rothrock of the California Manufacturers and Technology Association told the AP that "2015 is right around the corner and manufacturers are making plans this year for the next three-to-five years and capital investments may or may not happen in California based on the current regulations."

There have been protests from workers in affected industries. The state has said it is open to tweaking the system but is holding firm that it will happen. Bloomberg's Lynn Doan reported yesterday that "California's air resources board may adjust the number of carbon permits it plans to give to specific companies before the first auction of allowances in November under the state's cap-and-trade program." Doan noted that industry allocations wouldn't change, "just the distribution to companies within the sectors."

Cap-and-trade schemes sound good in theory -- what could be better than the idea that having to pay for carbon emissions both encourages companies to find ways not to do so and enriches the state at the same time?

But do they work? Do they actually reduce emissions? We're about to find out. No U.S. state has ever tried this before.

Frankly, it is hard to criticize the intent of the law. It is good to lower carbon emissions, but it is also hard to ignore the reality of the situation. Because the reality is that

The Los Angeles Times reported, "The independent Legislative Analyst's Office concluded that jobs probably will be lost because businesses can move elsewhere." If the entire country -- the entire world, for that matter -- were under a carbon cap-and-trade system, and that system were rigorously and fairly run, it might work. But it might be easier for companies to simply shift their production facilities to places that they deem less hostile.

In the L.A. Times report, proponents of the plan and ARB contended that the increase in green jobs will outweigh short-term negative effects. Well, green jobs haven't turned out as advocates have hoped. President Barack Obama, seeking reelection, famously promised five million green jobs, and the most optimistic and creative accounting only tabulated a couple hundred thousand today.

Counting on an explosion of green jobs in place of the conventional jobs surely to be lost to this cap-and-trade program is probably not a wise thing.