California's AB32 cap-n-trade: "could be worse than sticky"

It could be worse than sticky, argues Gary Stern, a power utility executive. Stern lived through the disastrous deregulation of the California power market a decade ago and fears the carbon market will be small and open to manipulation. The state refuses to set a limit for prices. Traders could learn how to corner the market (think Enron) and then hold hostage utilities and factories with no option but to buy sky-high permits on the open market.

State officials say they are working on new safeguards to stop just such efforts and will unveil them in July. California also plans to hire an external monitor to watch the markets — a key recommendation of Stern. “I’m not saying we would expect the same thing to occur in the emissions markets,” he said. “However, we didn’t expect that to occur in the electricity markets.”

Even if all goes well, nine years of carbon trade won’t be enough to end worries about climate change, especially if other states and nations don’t pitch in.

“The ambition doesn’t add up in terms of what the science is calling for. In fact it doesn’t get close,” said Greenpeace forest campaigner Rolf Skar, who derides the decision to give away any pollution permits at all. He also turns up his nose at California’s plans to let industry pay for “offsets” — projects to soak up carbon, such as forest management.

Offsets are seen as an important price safety valve — letting a redwood grow bigger to capture carbon in its wood is cheaper than building a carbon-free power plant, and a substantial portion of California’s emissions reductions could come from such schemes.

Owners typically pay contractors to verify such projects — which is not dissimilar to a bond issuer paying a credit agency to rate it — but designers say the offset program avoids conflicts of interest and project standards are extremely strict.

To make a serious dent in emissions, regulators will target transportation. Cars, trucks and planes spew out 40 percent of the state’s carbon, more than utilities or industry.

The state’s climate change law could have been called the “California Petroleum Use Reduction Act,” Mary Nichols, California’s top climate change regulator, joked last year.

The state is the third biggest user of gasoline in the world, after the U.S. as a whole and China, but drivers can change emissions very quickly — by leaving the car in the garage or buying a new, more efficient, car.

“You are just trying to get people to drive less, effectively, which is probably going to be quite expensive,” said Sikorski of Barclays.

Auto fuels are pulled into the cap-and-trade system in 2015. Gasoline prices are sure to rise as distributors are forced to buy carbon permits.

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