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OPINION: California's
cap-and-trade won't work
A
plan to combat greenhouse gas emissions is open to abuse.
California deregulated its electricity industry in 1998,
and shortly afterward the lights went out. Apparently, regulators hadn't
realized how easy it would be for unscrupulous traders such as Enron
to manipulate the state's power market once it was open to competition;
the results were rolling blackouts and skyrocketing electricity charges.
Californians are for all this -- in many areas, power bills are inflated
with extra fees to cover bonds and other expenses incurred during the
disastrous experiment.
We bring up this painful history because the state is about to embark
on a new program that will radically impact utility regulation. This
time, it's being driven by an environmental imperative: With the effects
of global warming becoming more apparent daily, the state has committed
to cut its greenhouse gases 25% by 2020, and electricity generation is
the state's second-biggest source of greenhouse emissions after the transportation
sector. To spur the needed changes, regulators are designing a cap-and-trade
program, in which carbon emissions are capped and power generators can
trade carbon credits -- permits to pollute -- among themselves. This
is a staggeringly complex undertaking that will once again create opportunities
for dishonest traders to manipulate the market.
In other words, unless the cap-and-trade program is designed extraordinarily
well, we could be looking at deregulation déjá vu. And
the consequences won't just be higher power bills. If California, which
leads the country in addressing the threat of global warming, gets this
program wrong, it could discredit efforts to fight the problem nationwide,
if not worldwide.
This page has addressed
the many dangers inherent in cap-and-trade programs (see the "A
Warming World" series at latimes.com/news/ opinion). To
sum up: Carbon-trading markets are easy to manipulate and produce volatile
energy prices, and the political influence of business and other lobbies
can skew the system to produce unfair outcomes. On top of all that, California
faces a special complication that would make its program the riskiest
ever undertaken.
Cap and trade has proved a winning strategy in the U.S. for reducing
emissions that cause acid rain. It's also being tried in Europe for carbon
emissions, though its progress there so far has been rocky. All
existing cap-and-trade programs have one thing in common: They regulate
the source of the emissions. The power plant or refinery or factory churning
out the carbon is responsible for controlling its own emissions and trading
credits. That won't work in California, because from 22% to 32% of our
power is generated out of state, and California can't regulate plants
outside its borders. Moreover, those out-of-state plants tend to be much
dirtier than local ones. So how does a statewide cap-and-trade program
account for all that pollution?
The solution
proposed by the California Public Utilities Commission, which is
developing the outlines of the program (the final decisions will be made
by the state Air Resources Board, but the PUC's recommendations will
carry a lot of weight), is to regulate the "first deliverer" of
electricity. This is whatever entity sells power to the California grid.
A lot of this outside power comes not from individual plants but middlemen
who buy power from plants all over the Western U.S. and sell it to investor-owned
utilities in California. It's very hard to track where these power wholesalers
are getting their juice. That presents an invitation for power dealers
to game the system by pretending they're selling clean power when it's
really dirty. It's also questionable whether the program would reduce
emissions. If power wholesalers are the ones responsible for buying carbon
credits, there's little incentive for dirty plants outside California
to clean up their act.
Carbon taxes are a simpler, harder to manipulate and less economically
damaging way to make polluters pay the costs of their environmental damage
than cap and trade. Yet because taxes have so little political support,
California regulators are charging ahead with a far riskier strategy,
which has never been tested. Cap and trade stands a decent chance of
working at the national level, where individual power plants could be
regulated regardless of which state they're in, but California will be
asking for trouble if it imposes a statewide program.
The PUC is expected to finalize its recommendations in August, after
which they'll be considered by the air board. If it goes ahead with cap
and trade, you might get a shock from your power bill. And be sure to
keep plenty of candles on hand.
Source: Los Angeles Times
March 11, 2008
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