If you thought cap-and-trade was dead and buried, think again.
It’s true that in Washington, the controversial proposal to fight climate change was squelched after a sweeping 2010 bill crashed in Congress and an aggressive media campaign by the fossil-fuel industry made the phrase “cap-and-trade” political poison. But on Jan. 1, California—the largest economy in the nation and the eighth-largest in the world—will start enforcing a robust cap-and-trade law that’s the first of its kind in the United States.
The rest of the nation, and the world, will watch closely. California’s energy and environmental laws have long been models for state and federal policy, and climate-policy advocates hope the Golden State’s statute is a vanguard of what’s to come.
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“California’s law is one of the largest and boldest efforts to limit emissions on the planet,” said Nathaniel Keohane, an economist with the Environmental Defense Fund, who served as President Obama’s special assistant for energy and environment on the National Economic Council. “Until now, in the U.S., a carbon law has been hypothetical, theoretical. California has an opportunity to show that this works in practice. It can work as a lab for the rest of the country.”
If the program is deemed a success—that is, if it cuts California’s carbon pollution without harming the state’s economy—there’s every reason to think that it will pave the way for more state and national action on climate change. Ultimately that, and not the environmental effects, will be the true measure of the law. Even considering California’s massive economy, cuts to state-level carbon pollution alone won’t be enough to stave off the worst effects of global warming.
“I think California becomes a model, and we need to do something on the national level,” said Rep. Henry Waxman, D-Calif., the ranking member on the House Energy and Commerce Committee and the chief author of the 2010 federal climate-change bill. “If we can show that putting a price on carbon works in California, that helps.”
If the law fails—by having little environmental impact or by inhibiting the state’s economy, which could be evident much sooner—it could be a final nail in the coffin for efforts, at least in the foreseeable future, to enact a national climate-change law. And a failure by the United States to act is almost certain to torpedo international efforts to work in concert to stop global warming.
A legacy of former Republican Gov. Arnold Schwarzenegger, the California law caps emissions of heat-trapping fossil-fuel pollution from power plants, factories, and oil refineries, with a goal of reducing them to 1990 levels by 2020. It requires industries to purchase permits to pollute, which can be bought and sold in a carbon market.
California has a long history of leading the way on environmental policy. The state pioneered energy-efficiency standards for furnaces, household appliances, and buildings that became models for national standards. A 2002 California law to slash tailpipe pollution paved the way for the Obama administration’s aggressive new fuel-economy standards for vehicles that are now transforming the U.S. auto industry.
Both supporters and opponents of climate policy are acutely aware of the Golden State’s track record as a proving ground for national programs, and that is why the fossil-fuel and manufacturing industries are uneasy about the cap-and-trade law. Still, the oil and coal industries say that if the California model fails, it will cement their case that serious climate policy is economically untenable.
“We see the grand experiment going on out in California as informing the rest of the country,” says Stephen Brown, a lobbyist for Tesoro, an oil-refining company that campaigned in 2010 to undo the California law. “The concern is that elements of this will start popping up in different states. The other 49 states will see if California is the canary in the coal mine.”
Meanwhile, the creation of a major financial market for buying and selling pollution permits will have a big impact—not just on global warming, but on the global financial market to price and trade carbon pollution. About 20 percent of the world’s economies already have carbon-pricing or cap-and-trade laws in place—including the European Union, Australia, New Zealand, South Korea, and the province of Quebec. China is moving forward on a plan to implement cap-and-trade programs in some of its provinces. California is already planning to link its carbon trading with Quebec, and talks are beginning about also linking to Australia’s market, creating a truly global market—one that could make billions of dollars for its participants, or come crashing down if any of its members fail.
California’s environmental officials are aware of the scrutiny their program will face. In the years leading up to implementation of the law, the state worked closely with the European Union, for example, to learn from mistakes made in its cap-and-trade program, which has come under criticism for allowing the price of carbon permits to sink too low—meaning that the program, in some years, has done little to actually cut pollution. “We learned what not to do from the E.U. We looked at their program, consulted with them, and made adjustments based on their experiences,” said Dave Clegern, a spokesman for the California Air Resources Board, the agency that will run the program.
“This will be the only program of its kind in the country,” he said. “The pressure to get it right is coming from many levels. We know the world is watching. The country is watching. California voters, who supported this program, are watching. The best way to handle pressure like that is to succeed.”
This article appears in the December 15, 2012 edition of National Journal Magazine as On the Horizon.