Over 95% of climate scientists have concluded that CO2 is the primary cause of global warming. Solving the problem requires a dramatic reduction in CO2 emissions. Some people are altruistic, but almost all businesses are bottom line oriented and will not reduce their CO2 emissions unless they have an economic incentive to do so. There are two realistic incentives: taxing CO2 emissions or setting up a cap and trade program for CO2. Since increasing taxes is politically unfeasible, the most practical approach is with a cap and trade program.

The U.S. Environmental Protection Agency implemented a cap and trade program for sulfur dioxide (the primary contributor to acid rain) in 1995. This program was a great success, and essentially eliminated the acid rain program. California passed AB32 in 2006 to accomplish the same goals for CO2 emissions. This law sets a cap on emissions from almost all sources, and gives polluting companies a certain number of allowances. If companies reduce their CO2 emissions (with renewable power generation, more efficient processes or smokestack scrubbers), they can trade these emissions to companies that still pollute.

Many California companies succeeded in reducing their emissions. In fact, utilities installed so much wind and solar (courtesy of their RPS requirements) that they now have excess allowances to trade. But the gas refining industry didn’t act, and starting on January 1, 2015 they will have to purchase extra allowances. How much? When a gallon of gas is burned it emits about 20 pounds of CO2, which is 0.009 tons. At the current market price of CO2 allowances of $12/ton, that extra CO2 amounts to about 11 cents. So the downside of cap and trade is that the price of gas in California is likely to go up by about a dime. The upside is that we get cleaner air and an even stronger green economy.

But not everyone wants this outcome. In particular, the oil and gas refining industry tried to suspend AB32 in 2010 when they sponsored Proposition 23 (which was defeated by 62% of voters). This year they are sponsoring AB69, which will delay the application of cap and trade to transportation fuels. It’s shaping up as a battle between deep-pocketed dirty fuel polluters — and just about everybody else in California. I’m hopeful that California’s cap and trade program continues to succeed, and maybe someday soon will be adopted by the other 49 states. Please join me on this week’s Energy Show as we talk about the real economic impact of cap and trade.