USA: Putting a Price on Greenhouse Gases Creates Incentives for Developing New Technologies

Fixing a major flaw in cap-and-trade (Energy Institute at Haas)

While many Californians are spending August burning fossil fuels to travel to vacation destinations, the state legislature is negotiating with Gov. Brown over whether and how to extend the California’s cap-and-trade program to reduce carbon dioxide and other greenhouse gases (GHGs). The program, which began in 2013, is currently scheduled to run through 2020, so the state is now pondering what comes after 2020.

The program requires major GHG sources to buy “allowances” to cover their emissions, and each year reduces the total the total number of allowances available, the “cap”. The allowances are tradeable and their price is the incentive for firms to reduce emissions. A high price makes emitters very motivated to cut back, while a low price indicates that they can get down to the cap with modest efforts.

(Thanks to GRC Member Marcelo Lippmann, Staff Scientist (retired) at Lawrence Berkeley National Laboratory for the submission.)

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