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The signing ceremony for California’s new climate change law—the Global Warming Solutions Act of 2006 (AB 32)—included a satellite feed of British Prime Minister Tony Blair heralding the achievement. The European interest in California’s new law, however, runs deeper than just a shared environmental vision. For approximately two years now, Europe has been experimenting with carbon emission trading. This market-based mechanism at the core of the Kyoto Protocol is intended to help countries achieve their respective greenhouse gas emission targets. With passage of AB 32, California, the world’s fifth‑largest economy, is now contemplating whether to develop its own carbon trading market in the state. If that happens, the primary question on almost everyone’s mind will be whether California should link its market with the existing European program. While the enthusiasm for such a link is strong, a number of problems should be addressed before California and Europe consummate such an arrangement.

The inclusion of a market-based compliance mechanism in AB 32 was negotiated up to the end. A large portion of the regulated community wants a trading program, while a significant environmental faction is opposed. This debate has pitted the Governor’s office against the leaders of the California Legislature in a remarkably open tug-of-war that is now moving to the administrative rulemaking arena before the California Air Resources Board. The new law only provides that the Board “may adopt” such a program. All eyes are on the Board and on whether it will, or will not, include emission trading as part of the implementation of this new law. Already the Board is soliciting information and advice, trying to gain a better understanding of the benefits and pitfalls involved with emission trading.

Large-scale carbon‑emitting industries have commonly stated a preference for one global integrated emission trading market, as opposed to a patchwork of different regulatory markets that operate on different standards and principles. In seeking to normalize one approach to fit all regulatory efforts, one could expect that Europe’s up-and-running market would be a likely model. However, some of the nuances in how that market is set up, and the international legal principles underlying that market, are unique and do not easily translate into a model for California.

Two primary problems exist with the European trading market: (1) it is designed to be one market but is premised on different individual nations that have committed to meet their own different individual targets—presenting different challenges and pressures that may or may not be feasible under any circumstances; and (2) it depends upon a uniform data approach that is not easily assured across the participating countries. As for the first problem of individual national targets, the Kyoto Protocol (like California’s law) uses 1990 emissions as a benchmark—countries under the Kyoto Protocol have committed to achieving 5% below their 1990 greenhouse gas emission levels by 2012. While this appears to be a uniform standard, it does not represent an entirely level playing field. Since 1990, some European countries have seen their actual national emission levels increase significantly while others have barely increased at all. Moreover, within Europe, there have been adjustments made in favor of more‑developing economies—adjustments that in effect act as a subsidy to reallocate the burden of meeting reduction targets. As a result, some countries participating in the European market will be more capable of reaching their targets and thus generating credits quicker. Integrating California into this program—one where a form of economic subsidization has been built in—may or may not be in the interest of California’s economy.

As for the second problem, the data that underpins each country’s National Allocation Plan for the Kyoto Protocol has built into it a level of uncertainty. Indeed, the guidelines expressly recognize that emission measurements—particularly historic measurements—can be imprecise and, at least in the early stages of implementation, have not been collected uniformly country by country. This data uncertainty played out in dramatic fashion this April when the price of carbon on the European exchange dropped by nearly two-thirds due to the unexpected discovery that many countries were going to handily meet their targets. That plummet in price represented a $36 billion drop in the value of the overall market. Unless and until uncertainties related to poor data understanding and collection have been minimized, the European market will remain a relatively risky carbon emission trading partner for California.

Any approach to a carbon emission trading market under AB 32 would do well to consider carefully these problems with the European model. For now, California should focus on creating its own market within the state before aspiring to go international. Until the Kyoto kinks have been worked out, the vision of a global emission trading market should probably be shelved.

Citations

California Global Warming Solutions Act of 2006, 2006 Cal. Stat. 488
(AB 32)