This week, California rolls out the heavy artillery in its attack on climate change with a program called “cap-and-trade.” It’s like a stock exchange for carbon emissions, where the state’s biggest polluters have to buy the right to emit greenhouse gases. It’s the most ambitious climate change policy in the country, but not everyone is happy with it.

So how does it work?

(Check out the radio story above for an explanation involving poker chips, musical chairs and Monopoly money.)

The first part is the cap. Until now, businesses haven’t had to worry about how much carbon they emit from burning fossil fuels. Now, there’s going to be a cap on total emissions. At first, they can emit about as much carbon as they have been. But then, the cap on emissions begins to come down.

More than 300 businesses, from power companies and oil refiners, to glass makers and food processors, are required to participate in the cap-and-trade program. The government could tell each company how much it’s allowed to pollute, or set a tax on carbon. But California’s doing it differently by creating a market. That’s where the “trade” part of cap and trade comes in.

In order to keep up with the lowering emissions cap, businesses have three choices. The first is pretty straightforward: reduce emissions.

The second option is to buy permits to pollute. The state will give companies allowances — each allowance grants a company permission to emit one ton of carbon dioxide. Companies can buy and sell allowances on the carbon market.

And the third option is known as “carbon offsets.” Companies can essentially pay other organizations to reduce greenhouse gases, for instance, by protecting forests. Each offset counts toward the firm’s compliance obligation, though companies are limited in how many offsets they can use.

But will it work?

California has been preparing for this moment for a long time. When Governor Arnold Schwarzenegger signed AB 32, the state’s landmark global warming bill in 2006, he set an ambitious goal: to cut California’s greenhouse gas emissions 30 percent by 2020. Cap-and-trade is supposed to help accomplish a big part of that goal.

“We want to reduce the amount of pollution, but we want to do it in a way that isn’t too costly to the economy,” says UC Berkeley economist and energy analyst Severin Borenstein at UC Berkeley. He says the market will create some flexibility for businesses.

But some businesses aren’t so sure about it.

“I am very very worried about this program,” says Dorothy Rothrock from the California Manufacturers and Technology Association, which represents about 700 companies. Her members are concerned that cap-and-trade will put them at a disadvantage to companies outside of the state.

And Rothrock says the costs will eventually be passed on to consumers. For instance, the price of gas may go up. “It’s not like they’re suddenly gonna see a big bill in their mailbox the next day, but the costs will be coming and there won’t be a lot we can do to stop it,” she says.

California has taken steps to minimize this impact. At first, nearly all of the allowances are free for businesses, and some of the proceeds from the carbon market will go to communities hardest hit by pollution. Regulators also argue that the gains in energy efficiency spurred by the program will outweigh any higher costs.

And environmental advocates point out, if we don’t cut emissions now, the impacts of climate change will be even more expensive in the long run.

Emily Reyna with the Environmental Defense Fund says it’s important for California to take the lead.

“If it’s done right here in California, which I believe it will be, then it can be a real model for the rest of the country, the rest of the world,” she says.

On Wednesday, all eyes will be on California, when the state’s carbon market opens for the first time.

Cap-and-Trade 101: How California’s Carbon Market Works 18 December,2015Molly Samuel
  • AB 32’s cap and trade will put a price on carbon and, it is true, increase the cost of operations to CA carbon emitters but there is also has a benefit which is not adequately covered in this article. What is the monetized benefit of capping carbon at let us say 400 ppm? What is the monetary cost of the recent east coast Sandy? Avoiding the cost of a future Sandy is one AB 32 benefit. The avoided cost of a future west coast Sandy is a direct CA benefit. The AB 32 cost must be subtracted from its benefits to get the net benefit of AB32.

  • Scott Kruse

    Double efficiency and you cut cost by one-half.

  • SidAbma

    Besides Renewables, natural gas is California’s next energy source. It is used to heat large commercial buildings. It is used by industry to produce almost everything else we consume. It is used at the power plants to produce electricity. As the above schematic shows the Hot exhaust goes up all those big chimneys into the atmosphere as emissions. The AB 32 goal is to reduce those emissions. Cap & Trade will also bring down those emission numbers.

    America’s residential market also uses natural gas to heat building space and to heat water. They have high efficiency water heaters and condensing boilers that combust the natural gas, but these high efficiency appliances operate at mid 90% energy efficiency and vent Cool exhaust into the atmosphere.
    America has only 1 grade of natural gas, used by all, so why do the large natural gas consumers not combust their natural gas to over 90% efficiency?

    Increased natural gas energy efficiency = Reduced utility bills = Profit
    Increased natural gas energy efficiency = Reduced global warming
    Increased natural gas energy efficiency = Reduced CO2 emissions
    Increased natural gas energy efficiency = Water conservation

    The US DOE states that for every 1 million Btu’s of heat energy recovered from those waste natural gas exhaust gases, and this recovered heat energy is utilized in the building or facility where it was combusted, 117 lbs of CO2 will Not be put into the atmosphere.
    The technology is called Condensing Flue Gas Heat Recovery.

    How much natural gas was combusted in California last year by the power plants and industry and large commercial sized buildings?
    How much of this energy was wasted as hot exhaust? 20%-40%-60%?

    Could this make a difference in California’s Climate Change goals?
    How many jobs could be created recovering and utilizing all this recovered heat energy? Could this make a difference to California’s economy?

    What natural gas is not wasted today, will be there to be used another day.

  • Pingback: 17 Things to Know About California’s Carbon Cap | Sightline Daily()

  • Pingback: Stock Trade How It Works | Today's Penny Stocks()


Molly Samuel

Molly Samuel joined KQED as an intern in 2007, and since then has worked here as a reporter, producer, director and blogger. Before becoming KQED Science’s Multimedia Producer, she was a producer for Climate Watch. Molly has also reported for NPR, KALW and High Country News, and has produced audio stories for The Encyclopedia of Life and the Oakland Museum of California. She was a fellow with the Middlebury Fellowships in Environmental Journalism and a journalist-in-residence at the National Evolutionary Synthesis Center. Molly has a degree in Ancient Greek from Oberlin College and is a co-founder of the record label True Panther Sounds.


Lauren Sommer

Lauren is a radio reporter covering environment, water, and energy for KQED Science. As part of her day job, she has scaled Sierra Nevada peaks, run from charging elephant seals, and desperately tried to get her sea legs - all in pursuit of good radio. Her work has appeared on Marketplace, Living on Earth, Science Friday and NPR's Morning Edition and All Things Considered. You can find her on Twitter at @lesommer.

Sponsored by

Become a KQED sponsor