Sunday, October 29, 2006

Market & Regulatory Approach for Pollution

Perhaps this strange bill will be allowed to work in a somewhat sound fshion after all.

An excerpt.

Daniel Weintraub: Grit hits the fan on pollution credits
By Daniel Weintraub - Published 12:00 am PST Sunday, October 29, 2006

California's landmark law to fight global warming by clamping down on greenhouse gas emissions has not even taken effect, and already the Democrats in the Legislature who crafted the bill are at odds with Gov. Arnold Schwarzenegger, who, if he is re-elected Nov. 7, will be responsible for making it work.

Democrats and their environmentalist allies are charging that Schwarzenegger is breaking commitments made during a long summer of negotiations on the bill, AB 32. The governor, they say, is taking steps that could undermine the state's ability to cut greenhouse gases 25 percent by 2020, the bill's ambitious goal.

Schwarzenegger aides counter that the governor is merely trying to position the state's environmental bureaucracy to get a running start implementing the law when it goes into effect Jan. 1.

Behind the confrontation is a fundamental dispute over exactly how California should force its industries to comply with the caps on greenhouse gas emissions as they are phased in during the years ahead.

Democratic lawmakers and most environmental groups want to emphasize state-imposed standards and regulations to limit greenhouse gases.

Industries would be ordered by the Air Resources Board to retool their operations in particular ways to limit the production of carbon dioxide.

The state, for example, already has adopted regulations requiring automobile manufacturers to reduce climate change emissions from cars and light trucks they sell in California. The state might also force the electrification of truck stops to reduce the idling of diesel engines, or place new controls on commercial refrigeration.

Schwarzenegger is not averse to this kind of direct regulation, which opponents characterize as "command and control." But the governor has also insisted that the new regulatory regime include a market-based system that allows companies to buy the right to pollute from others who have done more than their share to reduce greenhouse gas emissions.

The idea behind such a market is to achieve the desired amount of reduction without crippling a particular industry or company. Here is how it works:

Suppose it costs Company A $100 to reduce its emissions by 1 ton, while Company B, because of the way it operates or the machinery it uses, might have to spend $500 to achieve the same reduction. Under a strictly regulatory system, both firms would have to spend whatever it cost to make the required changes, even if doing so made Company B uncompetitive in its industry.

Using a market-based system, the two firms can work together in a way that benefits both while still achieving the reduction desired by the government. Company A could spend an extra $100 and reduce its emissions by 2 tons, rather than the 1 ton required by the regulation. Company B could then pay Company A $200 for its extra "greenhouse gas credit." Company B uses that credit to satisfy the government's requirement to reduce its emissions by 1 ton.