How much should a metric ton of carbon dioxide cost? How much do companies with huge carbon emissions actually care? When an oil company lobbying group says they “have never been against” programs that put a price on carbon, maybe it's time to ask if we need to care, either.
“Cap-and-invest” is an emerging name for a system that has addressed pollution for almost thirty years. Altering just one word from its predecessor “cap-and-trade”, it also hardly differs in functionality. New York has recently adopted it, and Washington has used it for the last year. Come November, Washington voters get to choose whether to keep cap-and-invest implemented in their state. Initiative 2117 calls for the repeal of the state’s Climate Commitment Act (CCA), which includes the state’s cap-and-invest program. What exactly is cap-and-trade, and what does this opposition say about the state of pro-climate legislation?
Cap and trade is a supply and demand based system used to encourage companies to reduce pollutants and is one of the most prominent climate solutions globally. In this system, the government sets a cap for the maximum amount of emissions a company can release. Based on this cap, the government distributes a certain number of permits that act as emission allowances for each company. One permit equates to an allowance to emit one metric ton of carbon. Every year, the cap (the number of permits in circulation) is lowered to ease companies into operating at emissions levels low enough to combat climate change.
As a firm releases more carbon, their number of remaining permits will dwindle. However, running out of permits does not mean the company has to stop emitting. A firm that exhausts all of its permits can buy more from the firms with permits left over. This is done through auctions held by the government. The potential revenue to be earned from their selling extra permits is supposed to incentivise firms to reduce their emissions; companies should want to use greener methods of operation to stay below the ever-declining cap.
On paper, the intention of cap-and-trade is to motivate businesses to find more carbon-efficient ways of operation. But in practice, environmentalists are left to question its effectiveness. There are multiple loopholes that hinder the reduction of emissions, one being that the cap is often set too high in the first place. Companies take advantage of this to hoard permits to sell them later when the cap is lower and the price of emissions is higher, creating the illusion that they are decreasing their pollution along with the decrease of the cap. Worse, many companies are given permits for free. In California, certain industries (including oil and gas) were given free permits for the first few years of the programs, yet the government receives pushback from business owners when the time to reduce the flow of free permits nears. All of these gaps in cap-and-trade rules make it difficult for states to reach their carbon emissions goals.
For cap-and-invest, all of the same rules apply: permits are allocated, and those that need more buy more through auctions. However, they do differ in terms of their auctions. Cap-and-trade auctions are held for the purpose of bidding extra permits to companies that need them to legally increase their emissions, but not much is being reported on how companies use these proceeds. In contrast, the revenue from cap-and-invest auctions are explicitly used to fund investments in cleaner alternatives for transportation, energy and overall decarbonization. The “trade” between companies is transformed into “investment” in going green.
Washington state has raised over $2 billion in decarbonization efforts through these auctions. The full results of how these funds will affect the lives of Washintonians has yet to be seen, but a $200 tax credit on electricity bills for low and moderate income families was distributed in September. However, in a move that jeopardizes these gains, the state aims to expand its carbon market in the next phase of the program. Governor Inslee intends to link the Washington carbon market with that of California and Quebec’s— the proposed benefits being that the price of a permit would be more stable and would strengthen the CCA in the long run. But in doing so, more permits would go into circulation, causing the price of carbon to fall, making it cheaper to pollute.
The post-linkage version of Washinton’s cap-and-invest program will have even less leverage against companies exploiting loopholes despite its initiation under the premise of keeping the permit market more “stable”. The linkage of the carbon market will reduce the investment ability of the program; while Washington has measures against permit hoarding and free allowances for all industries, California does not. This will lead to a surplus of permits. With a drop in the price of carbon, the motivation for companies to limit emissions drops too. Why shift to cleaner operations when the price of carbon is so low? Under the linked program, investment will decrease relative to emissions released. What are the legislative options pushing against this downgrade?
This November’s opposition to cap-and-invest, Initiative 2117, cites increasing gas and consumer goods prices as a primary reason to remove cap-and-invest and never reinstate a similar program within Washington again. It seems that instead of a stronger program for reducing emissions, the opposition wants to stop addressing the issue entirely. It is difficult to confirm if the rising consumer prices is truly an effect of the CCA, since the permit auction activity of companies is kept obscured by confidentiality rules. Regardless, Initiative 2117 is a step in the wrong direction for holding companies more accountable for their emissions, considering that the goal is to prohibit emissions restrictions across all industries.
But the current cap-and-invest program trajectory isn’t excelling at corporate accountability either. The shift from “cap-and-trade” to “cap-and-invest” is a signal that governments want to highlight their investment into everyday people’s wellbeing. However, the lack of fundamental remodeling to close loopholes doesn't push companies to actually alter the Earth’s trajectory toward climate change. Even more suspect, Amazon, oil mogul BP, and other entities in a coalition have raised over $11 million to push against I-2117 in favor of cap-and invest.
The incremental approach of lowering a cap year by year does not address the fact that we are reliant on oil and gas companies functioning as they do today. All arrows point to looking past the revenue of the next permit auction and to the more dramatic ways of restructuring our relationship with resources to make deeper cuts on emissions. The fact that the only opposition to it this November is in favor of explicitly ridding companies of responsibility suggests that the current pro-climate programs are in need of an overhaul. As long as oil firms are working to help the current cap-and-trade programs persist, we can trust that a better solution is out there.
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