The Goldilocks Price for Carbon

Finding the right price for carbon is no easy task. It needs to be high enough to encourage industries to reduce their emissions, but not too high so as to cause them to move out-of-state or make them uncompetitive with non-California competitors.
December 30, 2012, 11am PST | Irvin Dawid
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Felicity Barringer, the New York Times environmental reporter based in San Francisco, goes to Los Banos (Merced County) to The Morning Star Co., a sprawling tomato processing plant, to understand how the state's new 'cap & trade' system will affect the business, and how it will be implemented by the regulators.   

"Nick Kastle, a company spokesman, said Morning Star’s margins are too slim to absorb new regulatory costs. But he also worries about the consequence of passing them on. He knows that the California garlic industry lost half its market to Chinese imports in less than a decade, and notes that China’s tomato-processing industry is on the rise.

More allocations go to industries that are at risk of leaving the state and emitting their pollution elsewhere or of ceding market share to foreign companies that are likely to be big emitters. The term of art for the problem is “leakage.” The more leakage, the less effective the California law will be at reducing greenhouse gas emissions over all."

"Allocations" are state-issued allowances — one per metric ton of emissions. They can be given free to an industry or purchased on the carbon allowance market.  At the Air Resources Board's first sale of carbon allowances on Nov. 14, the cost was established at $10.09 per metric ton of carbon dioxide or equivalent.

"For many economists, the crucial issue for now is not emissions but the creation of a viable market that sets a price on carbon. “The bottom line of what we’re trying to achieve here is a stable, predictable price of carbon,” said Frank A. Wolak, a Stanford economist. “If it’s a stable price, people are more likely to say, ‘I’ll make the investment because at this price it is going to save me money.’ ”

On a separate but related note on the cap & trade program, the CA Public Utilities Commission on Dec. 20 approved the proposed "climate dividend" - a credit that residential and small business ratepayers will receive toward their utility bill twice a year.  The dividends will come from the allowances sold in the carbon market.

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Published on Tuesday, December 25, 2012 in The New York Times - Business Day - Energy & Environment
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