Some states out west are attempting to curb climate change using capitalism. But some environmental groups say it hamstrings their state’s ability to raise more funds to fight pollution by forcing more conservative guardrails.
California, Washington State and the province of Quebec in Canada each have a carbon market, designed to create financial incentives to reduce greenhouse gas emissions. They’ve now outlined a plan to join forces and combine their markets.
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“When that happens, it’s going to be the biggest news of the year,” Dallas Burtraw, senior fellow at Resources for the Future, told Straight Arrow.
What’s a carbon market?
Essentially, a carbon market lets companies buy and sell carbon credits or allowances. Companies that pollute have to pay for their emissions, while companies that reduce or remove pollution can earn money by selling credits.
It’s like a marketplace for pollution.
“A carbon market is a commodity market for the buying and selling of carbon dioxide emission allowances,” Burtraw said.
Companies are given or have to buy carbon allowances, with each allowance for the most part representing permission to emit one metric ton of greenhouse gases.
The government sets a limit on the total number of allowances available, which creates a cap on emissions.
“It’s often called what’s called a cap-and-trade system,” Todd Myers, vice president for research of the Washington Policy Center, told Straight Arrow. “Basically, there is a limited amount of CO2 that can be emitted from gasoline, diesel, natural gas, those sorts of things. And so, if you’re going to combust gasoline or natural gas, you have to pay for every amount of CO2 that you’re going to emit.”
Those companies can buy allowances at government auctions, and companies that need fewer allowances can sell their extras to companies that need more.
The government can then reduce the number of allowances available, making pollution more expensive and encouraging companies to cut emissions.
“There’s an auction for them, and the price goes up,” Myers said. “It’s just supply and demand. Supply goes down. If demand doesn’t go down, then the price goes up. The goal is to drive demand down using price that way.”
California and Quebec have already joined their markets. That means a Quebec allowance can be used in California and vice versa.
The last auction took place on Aug. 19 and brought in some $1.6 billion.
“With the collecting of auction proceeds, you have the ability to address distributional concerns or soften the blow for consumers,” Burtraw said.
Joining forces
California and Quebec’s markets linked in 2014.
Washington launched their market in 2023.
Under this new proposal, all three will be linked.
Linking up provides several benefits, including creating a larger pool of buyers and sellers. That gives companies more flexibility to reduce emissions while potentially lowering costs and making carbon prices more stable.
“Most importantly, it sends a signal to other states and to the national government and internationally about the commitment of these jurisdictions to reduce their greenhouse gases,” Burtraw said.
There are some differences between how Washington operates compared to the other two.
But the biggest benefit for Washington is bringing down prices.
“California’s market has been around for much longer than ours,” Myers said. “It is very stable, and the prices have been about half what they were in Washington state for those permits. So, when we join their market, their prices will come up a little bit, but ours will go down a lot.”
Myers added that another benefit of joining a larger market is the regulation because Washington’s “credit limits were ridiculously political and arbitrary,” and the state’s climate policy is a “mess.”
However, not everyone is on board with the plan. The Environmental Justice Council said they believe this merger could hurt areas where pollution causes the most issues.
They also voiced concerns that the larger market could lead to higher energy costs for lower-income consumers, while saying Washington had not provided enough evidence that the benefits or safeguards would work.
“The environmental groups who are like that, they like a lot of money because that’s what their whole strategy is,” Myers said. “To get as much money as possible, so the government can spend it on their pet projects. So that’s what they’re interested in. They’re angry that the prices are going down.”
What’s next?
Some 3,000 miles to the east, the Regional Greenhouse Gas Initiative (RGGI) has a similar system to what’s going on out west. That initiative covers 11 states.
Their recent auction also brought in more than $1 billion.
“Those proceeds then go back to the states for either investments or for providing compensation, or in Virginia’s case, for reducing electricity prices,” Burtraw said.
There’s already international cooperation here with Quebec involved in the western pact, and it could serve as a model for others.
“The hardest thing is to switch from Canadian dollars to American dollars, but you can definitely create a system that works well,” Myers said. “It’s very stable.”
Much of the world remains focused on climate change and how to slow it down. While the Trump administration has pushed back on the science of climate change, states are able to attempt to reduce emissions through programs like this.
Burtraw believes this merger will help clear the path.
“I consider it the biggest news of the year because it sends such a strong signal about the viability of this kind of approach and raises its credibility on the national and international stage,” he said.
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