Recent Federal and International Developments Good for California Cap and Trade

Plans announced by the White House yesterday (June 25) show a credible pathway to meet targets pledged by the President pursuant to the Copenhagen Accord (reduction of greenhouse gas emissions 17% below 2005 levels by 2020). Relatedly, last month the Obama administration increased the assumed social cost of greenhouse gas emissions used for cost-benefit analysis of proposed regulatory decisions to 35 cents per ton, up from 21 cents per ton. These developments arguably represent the Obama administration’s most comprehensive and meaningful push for federal regulation of greenhouse gasses. 

Last week the European Environment Committee of the European Parliament also approved a proposal to backload the issue of new emissions allowances so as to drive up the price of carbon emissions allowances and credits in the European Emissions Trading System. A similar proposal was refused by the European Parliament in April which depressed the trading price of carbon and led many to doubt the viability of the EU-ETS. [See blog article here.] Last week’s backloading proposal is less aggressive than the one recommended in April. Now that the United States can be said to be taking credible steps to reduce emissions, arguments that the EU cannot support a high price of carbon for reasons relating to global economic competiveness will lose force. Therefore, it seems that the revised backloading proposal has a good chance of passing the European Parliament, which should increase the trading price of carbon (and that yesterday would have been a good day to buy European carbon futures). The European Parliament is scheduled to have a plenary vote on the backloading proposal on July 3.

This is a good development for California’s cap and trade program because California probably cannot sustain environmental regulations that result in too broad a spread between its energy costs and that of its neighbors, and a high profile failure of carbon cap-and-trade across the Atlantic would undermine confidence in the viability of California’s attempt at a market-based carbon policy.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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