As California and the West begin to set up their own carbon markets, Europe’s lessons are informing the work. “There were some design flaws and people are mindful of that,” says Dale Bryk, a senior attorney with the Natural Resources Defense Council, who is advising California’s market planners. “Basically, if you set the overall emission level high and don’t monitor it, you won’t have a robust market.” In addition to setting correct pollution limits, California will consider auctioning off pollution allowances to ensure a healthy starting price. The proceeds of the auction could be invested in clean energy projects or to help minimize the expected rise in electricity rates as utilities absorb the new costs of paying for carbon pollution.

California is also working to close another potential loophole by tying emissions in the utility industry to electricity sold in the state, as opposed to simply generated there; this will prevent utilities from jumping to other states without greenhouse gas caps to buy energy.

For the Western carbon market to work, states may also have to limit or restrict the participation of so-called offset projects, such as the Collins Companies’ forests.

The Chicago Climate Exchange, where 65 companies and local governments trade carbon emissions to accomplish modest reduction goals, is fairly lenient with offsets. Forest conservation and no-till farming projects (which leave carbon trapped in soil) are considered bona fide offsets, as are capturing methane gas from landfills and investments in renewable energy generation — wind, solar or small hydroelectric systems — in the developing world. The European market allows many of the same activities to offset emissions in the developing world, such as retrofitting industrial operations and converting power plants to renewable energy. But it does not allow forestry projects, because officials consider them too difficult to certify and monitor. The Northeastern U.S. carbon market will fall somewhere in between, allowing a wide range of offsets, but with strict limits: Offsets can only equal 3 percent of power companies’ overall emissions, and the projects — such as reforestation and methane gas capture — must be within the United States.

Hickox, the chair of California’s carbon market advisory group, supports a broad range of offsets in the Western market, if for no other purpose than to widen the number of people and companies involved in greenhouse gas reduction efforts.

“This shouldn’t just be about the oil and energy sector,” Hickox says. “If we don’t create a system that allows as many people as possible to be part of the solution, we’re failing ourselves.”

But some experts say allowing a large polluter to skip out on greenhouse gas reduction because he’s paid a forest landowner to maintain a forest, for instance, won’t ultimately solve global warming.

“If we just let people buy offsets and don’t drive technical innovation, we’re never going to get where we need to be,” says the NRDC’s Dale Bryk. “The offsets have to be really limited.”

 

The learning curve about carbon markets is steadily increasing, but California and the Westwide market will likely be flawed in some way at the beginning. “They have to build in a learning period, and just because it’s not 100 percent right from the get-go, doesn’t mean it’s failed,” says Michael Ashford, vice president for carbon trading at Econergy in Boulder, Colo.

Market-based systems have the ability to solve environmental problems, but they’re not a guarantee. The program to reduce acid rain in the East was successful, but a similar market-based program to cut air pollution in Los Angeles failed in the mid-1990s, because, among other things, it did not allow polluters to save their early emissions reductions and get credit for them later on.

Only a dynamic market will ultimately deliver reductions in overall greenhouse gases. Already, Europe has reacted to earlier failures by adjusting its system and significantly lowering emissions allowances for countries beginning in 2008. The Northeast states will sell at least 25 percent of their allowances to regulated companies and invest the proceeds in renewable energy and electric rate reductions.

Now it’s the West’s turn to lay some solid groundwork for its own market. Gov. Schwarzenegger’s carbon-market point man is confident the region will be able to see its way through the contentious issues and the pitfalls that have so far marred carbon markets. “Getting there may not be pretty,” Winston Hickox says. “But we’ll get it right, because it’s in our economic interest to solve this problem.”

The author writes from Portland, Oregon.