Cap and Trade: One Piece of California's Climate Puzzle

When the California cap-and-trade program fully launches on January 1, 2013, it will create the second largest carbon market in the world. While cap-and-trade may be the most visible and perhaps most controversial part of California's climate strategy to reduce its greenhouse gas (GHG) emissions to 1990 levels by 2020, it is not the only -- or even the biggest -- piece of the puzzle. Cap-and-trade is but one puzzle piece among many that the state is pursuing, but it is a key piece since it can be expanded to make up for emissions reduction shortfalls from other strategies. Here are the main pieces of California's climate puzzle and how they fit together.

Transportation -- The Biggest Piece

California leads the nation in clean car standards. The state was granted a waiver under the federal Clean Air Act to adopt emission standards that are tougher than federal standards for cars and trucks sold within its border. Under this authority, the Pavley standards (named for State Senator Fran Pavley who authored the legislation), set lower emission standards for light-duty vehicles. The vehicle emission standards are expected to achieve over 30 million metric tons of carbon dioxide equivalent (MMTCO2e) emission reductions, resulting in the single largest piece of California's climate strategy. This should come as good news for consumers as more efficient vehicles mean lower operating costs.

Additionally, California is seeking a 10 percent reduction in the carbon intensity of vehicle fuels used in the state through the Low Carbon Fuel Standard. This standard factors in emissions generated from the combustion, production and transportation of the fuel. This would result in an additional 15 MMTCO2e in emissions reductions. While currently the subject of a legal challenge, this is a significant piece of the puzzle that if lost would have to be made up elsewhere.

Energy Efficiency and Renewable Energy

Two other key strategies build upon California's long and successful history in using energy efficiently and promoting clean, renewable energy. The state is implementing new energy efficiency standards for buildings and appliances, greater heat and power efficiency strategies and other energy saving measures. These efforts are expected to result in over 26 MMTCO2e of emissions reductions and billions of dollars of savings for California consumers.

California also requires electricity providers to get 33 percent of their electricity from renewable energy sources by 2020. Greater reliance on renewable resources, including solar, wind, geothermal, small hydro, biomass, landfill and digester gas, will result in over 21 MMTCO2e in emission reductions, and also support California's leadership in clean energy technology, green venture capital investment and the creation of new green jobs.

Other Parts of California's Economy

The formidable task of reducing emissions to 1990 levels will require contributions from across the economy. California plans on getting additional reductions from a mixture of strategies, including greater levels of recycling and waste diversion, improvements to port operations, increased industrial efficiencies, urban planning strategies to reduce sprawl and congestion, and reductions in high global-warming potential gases. All told, these efforts will leave about 18 MMTCO2e in emissions reductions to be achieved by the cap-and-trade program between now and 2020.

Cap-and-Trade -- The Final Piece

California's cap-and-trade program is designed to ensure that the state will succeed in meeting its emissions reduction goals. The program covers emission sources that emit more than 25,000 metric tons of CO2e per year -- about 600 facilities that account for 85 percent of California's emissions. The program will be implemented in phases with the first phase covering electric utilities and large industrial facilities, and then expanding to include distributors of transportation fuels and natural gas. Emissions will decline at about 2 percent per year in the first phase, and then decline at about 3 percent per year to get to the target. Regulated facilities will be able to meet up to 8 percent of their compliance requirements annually by purchasing carbon offsets.

Offsets are a key component of the program's cost containment and flexibility strategy. Offsets are generated by approved projects in uncapped sectors, such as forests and farms, that reduce GHG emissions above and beyond business as usual. If the pieces in California's climate puzzle described above fail to achieve their anticipated reductions, California can lower the cap, requiring the state's largest sources of GHG emissions to make further cuts. This ability to adjust the cap to adapt to the actual implementation and achievements of the other puzzle pieces make the cap-and-trade program the most elastic and, in many ways, the most important and powerful piece of the climate puzzle.

The Bigger Puzzle

California knows that its policies can only go so far to addressing climate change around the globe. So, the state is working to make its climate policies the foundation for broader action. By demonstrating that cap-and-trade is an effective and cost-efficient approach to achieving emissions reductions, California hopes to encourage the expansion, creation and linkage of regional systems to drive both national and international action.

By taking leadership in the fight against global climate change and building a new, clean energy economy, California is doing what California has always done best: creating the future. And that is a puzzle we all need to work together to solve.

Gary Gero is president of the Climate Action Reserve which runs the premier carbon offset registry in North America and helped inform the development of California's cap-and-trade program.