Use Market Pricing to Reduce California CO2 Emissions
Nobody should be surprised that California’s cap-and-trade program is the most cost-effective strategy to reduce carbon emissions. What’s astonishing is that policy makers insist on pursuing other more expensive options.
The existing mandate to GHG reduce emissions to 1990 levels by 2020 is apparently on an achievable path, helped by the historic recession, national automobile fuel economy standards, and the cap-and-trade program, which covers about 80 percent of emission sources.
Since November 2013, the Air Resources Board has held 13 auctions that set the price for GHG emission allowances. These auctions have revealed market prices ranging from $10 to $14 per ton of CO2, with an overall average for all auctions of $12.11 per ton.
But the market-based approach has not been sufficient for California’s elected leaders and regulators. And not surprisingly, regulatory and “state investment” strategies are far more expensive than the market.
The most ambitious command-and-control program is the low carbon fuel standard (LCFS), which requires fuel refiners to reduce the carbon intensity of gasoline, which in turn would reduce carbon emissions. Until refiners figure out how to produce a less carbon-intensive hydrocarbon fuel, they are allowed to purchase emission credits. These credits are supplied by ethanol and biodiesel refiners, and electric utilities (that provide energy for electric vehicles.). Credit prices have recently shot up since the carbon intensity mandate was tightened without a similar increase in availability of credits.
A recent report by Oil Price Information Service found that the cost to refiners of purchasing gasoline credits will increase to 4.67 cents a gallon, and to 3.29 cents for diesel fuel. The additional cost for annual fuel use in California is $770 million.
In its regulatory package, the Air Board estimated that the LCFS would reduce GHGs by six million tons in 2016, rising to 20.7 million tons in 2020. Assuming no change in the cost of these reductions, this results in a carbon price ranging from $37 to $128 per ton.
In short, the LCFS regulation is three to 10 times more expensive in reducing GHGs than the cap-and-trade system.
Investments made by spending revenues from cap and trade are not any better.
The ARB’s 2015 annual report on projects funded in 2013 and 2014 show poor cost-effectiveness for most projects, especially compared with the cap-and-trade benchmark.
Based on ARB estimates for lifetime GHG reductions of these projects: