California May Enter Emissions Market

California’s new greenhouse gas reduction rules could lead to trading of the right to emit heat-trapping gases in the state, energy experts say.

California passed legislation supported by Gov. Arnold Schwarzenegger two weeks ago that requires the state to reduce economywide emissions of greenhouse gases 25% by 2020.

“Trading is the only way efficiency will be gained to meet these caps,” Jason Patrick, a greenhouse gas broker with White Plains, N.Y.-based Evolution Markets Inc., said at an emissions conference this week.

The legislation largely leaves the details of how to cut emissions up to the California Air Resources Board. The rules suggest that trading of emissions credits -- in which companies that have cut emissions under set limits can sell credits to those that haven’t -- is one way to cut emissions but do not require it.

Greenhouse gas market players are eager to start trade in the U.S., the world’s largest polluter. In the European Union’s greenhouse gas market that was set up to meet its members’ obligations under the Kyoto Protocol, $8.2 billion worth of emission credits changed hands in 2005, its first year of trade.

California’s “legislate first, plan later” move stands in contrast to the other major effort in the U.S. to cap emissions linked to global warming, said the Regional Greenhouse Gas Initiative, a group of seven states in the Northeast.

Those states are attempting to regulate the main greenhouse gas, carbon dioxide, at power plants. The states held meetings for years to plan how to implement the cuts before agreeing to a model rule this summer. The states’ governments are working to pass the rules before the program starts in 2009.

Schwarzenegger’s move to cut emissions was as much a political move as an environmental action, some sources at the 2006 Global CO2 Cap-and-Trade Forum in Washington said. Schwarzenegger is running for reelection in November.

Sources say one challenge to the plan could be regulating emissions from cars. California has a higher percentage of vehicles than the group of states does, and cars are harder to regulate than stationary sources of greenhouse gases.

California has issued rules that would force manufacturers to cut carbon dioxide emissions from cars. But the rules have been held up by litigation from automakers.

California, which has long led the nation in environmental initiatives, has occasionally used “command and control” and other creative methods to combat pollution. The state passed a law restricting the imports of electricity on long-term contracts from dirty sources of electricity such as coal plants.

Schwarzenegger is expected to sign the emission legislation this month.