Nine months before California is set to finalize a trading system aimed at curbing greenhouse gas emissions, participants have the jitters.
Litigation threatens to delay the start of the multibillion-dollar program, and industry executives worry that its regulations will fall short of guaranteeing a smoothly functioning market. Fear is growing that it could be susceptible to the fraud that has plagued a similar European system.
"It feels as though the sun has risen in the West," Henry Derwent, head of the Geneva-based International Emissions Trading Assn., told traders, bankers, entrepreneurs, and oil and utility executives in Los Angeles last week.
"But however tempting it may be … to celebrate getting out ahead of the rest of the United States," he cautioned, California's trading system must show "real momentum."
"If the program goes poorly, if the regulations don't allow for a functioning market, there may be little market for California to lead," Derwent said.
Scientists say that carbon dioxide and other gases, mainly from burning fossil fuels, are trapping heat in the Earth's atmosphere leading to dangerous climate change, including rising sea levels, longer droughts, floods and melting glaciers.
In 2006, California passed the nation's most comprehensive climate law, mandating a cut in carbon pollution to 1990 levels by 2020 — about 10% below today's emissions. Although Congress balked on similar legislation in 2009, California has moved forward. Its plan to cap greenhouse gases at 600 industrial plants and allow companies to buy and sell emissions permits is modeled on Europe's 6-year-old cap-and-trade system.
The 700 executives who signed up for the Navigating the American Carbon World conference last week included officials from Alcoa, Chevron, General Electric, Shell, Southern California Edison and other major companies. They were joined by financiers from Merrill Lynch, Deutsche Bank, Morgan Stanley, Barclay's Capital and other large Wall Street firms.
The European system, which covers 12,000 companies in 30 nations, traded $123 billion in carbon allowances last year and is on target to slash emissions by 21% below 1990 levels over the next decade. But the market has been jolted by an estimated $6 billion in tax fraud schemes along with the recent cyber-theft of $50 million in carbon credits stored in the Czech Republic registry.
Today, "the eyes of the world rest upon this [California] market," said Tom Lewis, chief executive of Green Exchange, a consortium of Goldman Sachs, Credit Suisse and other banks and brokers. Noting the "fraud and violations" in Europe, he added that California could be an example for the U.S., but "the criticism … will be abundant if we get it wrong."
Carbon-intensive industries are concerned that California will not provide enough ways for them to offset their emissions by purchasing credits. Air officials have adopted rules for crediting forestry and livestock and the destruction of ozone-depleting chemicals but have yet to approve rules for projects such as cutting methane emissions from coal mines and rice farms.
California's program would be North America's biggest carbon market, three times larger than a utility-only system in 10 Northeastern states. By 2016, about $10 billion in carbon allowances are expected to be traded through the California market.
A court decision last month temporarily halted California's cap-and-trade program, after local environmental groups contended the California Air Resources Board failed to analyze alternatives to trading. The decision is expected to be appealed, but any delay in the January start date could hamper the financial planning of hundreds of companies.
"There's some uncertainty around when this program is going to start and maybe if it will ever start," said Graeme Martin, a Shell Energy official.
Air Resources Board Chairwoman Mary D. Nichols told the conference that "our ability to move forward is threatened as a result of litigation. We don't know how it will turn out.... Some segments of the community, who define themselves as environmental justice groups, just hate cap-and-trade" because they believe it will not cut pollution in their communities.
"We have to be open to the possibility there could be other approaches and that we could achieve [carbon] reductions in a different way," Nichols said. She added that Gov. Jerry Brown, who met with European Climate Commissioner Connie Hedegaard last week, "has the opportunity to put his mark on it."
The trading program, seen as a way for industry to cut costs, was incorporated into the 2006 law by former Gov. Arnold Schwarzenegger. Six other U.S. states had joined with California in a Western Climate Initiative but have declined to participate in its trading program. Three Canadian provinces have indicated they will join.
"The way forward lies in individual regional, national and state systems over the world reaching out to each other over time," Derwent said.
California's success, he added, will determine the eventual fate of carbon trading in Congress: "Washington needs to have evidence from California that the solution being applied here works."