Starting New Year's Day California began the nation's most ambitious experiment yet in fighting climate change, and it will do it more or less alone. For environmentalists depressed by years of the United States' unproductive "debate" on global warming, this moment is heady — and perilous.
Beginning in 2013, the nation's largest state, the ninth-largest economy in the world, will put a price on the greenhouse gas emissions responsible for global warming. California has established a cap-and-trade program, a design similar to what Congress considered but failed to pass in 2010. Perhaps the state in the new year will prove once and for all that markets can and should be marshaled in the fight against global warming.
Pricing carbon emissions is undoubtedly the right concept. California's cap-and-trade mechanism is supposed to minimize costs by establishing a statewide limit on total emissions and a market where businesses can buy the right to pollute a certain amount under that cap. When firms and consumers must pay for their emissions, they find the cheapest ways to pollute less.
But California's experiment might not work well enough to persuade others to follow along. The most obvious problem with the plan is that it relies far too little on the market-based cap-and-trade system and far too much on other, expensive, command-and-control regulations. Officials expect to achieve only about 23 percent of their planned emissions reductions through 2020 with carbon pricing; it's not clear what happens after that. The cost of the whole package, then, is likely to be higher than necessary.
As with any market, the bigger a carbon market is, the more efficient it is. But the group of Western states that were going to join California in creating a linked carbon market have not followed through. That not only reduces the size of the market California is creating, it could also dull its effectiveness.
Affected companies could move out of state and pollute just as much as they would have before California imposed its program. Out-of-state electricity generators, meanwhile, might try to reshuffle where they send their product — cleaner stuff to California, dirtier stuff elsewhere — instead of lowering their total emissions. Ironically, these issues, called carbon "leakage," might make their own solution — a national carbon price — less attractive.