Meaningful Markets: California’s Cap-and-Trade

Meaningful Markets: California’s Cap-and-Trade

The state of California is home to many things: Hollywood, Los Angeles, San Francisco, avocado lovers, and some of the best fast food chains in the country. However, the state of California is also highly affected by global climate change; over the past few years, the people of California experienced one of the worst droughts the state has ever known, not to mention the constant wildfires and mudslides that happen every year. These environmental disasters cost the state millions of dollars, and money cannot repay the people who have lost their homes and their lives due to these natural disasters. In 2013, California lawmakers decided that action must be taken to better  the living conditions of the citizens by implementing a carbon trading program. Known as Cap-and-Trade, the program was created in order to reduce the amount of greenhouse gases emitted in the state. Highly scrutinized for many years, it finally seems like the cap-and-trade program is making positive change in California.

Cap-and-Trade is a form of “natural” or “eco-capitalism”, which relies on a market-based incentives system to allow industrial companies to purchase pollution permits. When companies purchase “pollution permits” they are allowed to release a certain amount of pollution based on how many permits they have purchased. This is where the “cap” portion of cap-and-trade comes into play– companies are only allowed to pollute up to a certain limit. The trade portion comes with the idea of a market for pollution permits; companies that pollute less are free to trade their extra pollution permits to companies that pollute more. Here's a catch though: there is only a certain amount of pollution permits released per year; thus, the legislators can reduce the carbon footprint through allowing less permits for all companies on the market.

Therefore, it allows for a market for pollution permits to exist, meaning companies that pollute less are able to make a profit off of their unused permits. It’s a unique system that allows capitalism to control how many metric tonnes of carbon is being released into the air. The European Union, Republic of China, and South Korea are a few of the countries that utilize the Cap-and-Trade system. The state of California has the fourth largest cap-and-trade program in the world. However, California’s program operates in a specific way; the state allows industrial companies to have some pollution permits for free. If the company needs additional pollution permits, it  can either buy them from the state or purchase the additional ones from other companies that are not using them. Every three months, auctions for permits are held by the California Air Resources Board. In the state of California, the  number of permits the board releases every year has been decreasing , encouraging companies to innovate alternatives to their carbon emissions while reducing the overall amount of pollution in the state.

The state of California has not experienced radical drops in carbon emissions; however, they have made some progress. After the cap-and-trade program was implemented in 2013, the levels of emissions in the state dropped 1.5% in 2015. Emissions permits in the state of California cost about $14 per ton of carbon emitted, which is cheap compared to the $32/ton rate that was first introduced by the EPA in 1996. Companies have spent a collective $5 billion on permits since the auctions opened in 2012. Because of this program, gas prices have increased significantly in the state.  

The projections for the reductions of greenhouse gas emissions was more than 16% between 2013 and 2020, with an additional 40% by 2030. In order to put serious pressure on California companies about their emission levels, Governor Jerry Brown of California just extended the program. The state of California, which is very adamant about environmental protection policies and voicing opinions on the lack of compliance to the Paris Agreements,  has been combating the Trump administration since their first days in office. Therefore, the state decided to have their own benchmarks for carbon emission reduction that the rest of the country does not recognize at this time. The aspirations of the state have been very high, but many people think that the innovative companies in the state of California will make amazing progress concerning emission reduction.

In a recent article in the Los Angeles Times, the question was: is the cap-and-trade program in the state of California too successful? Having been criticized since it’s adoption in 2013, many people were quick to see the program as a failure. However, this program may very well be one of the few things that is preserving California’s future. The state government decided to take their own measures to regulate the excessive pollution that is ravaging the state’s environmental conditions because the  federal government is not only unconcerned, but is actively denying climate change. California’s cap-and-trade program has been called “the best designed program in the world” by Dallas Burtraw, a senior fellow at Resources for the Future, a Washington environmental think tank. Basically, companies have two choices given to them: they can develop and implement their own programs to reduce their greenhouse gas emissions through a process known as “command and control” or they can offer incentives to get companies to act voluntarily. Either way, there will be a reduction in emissions.

Nationally, the  program has been under fire by both sides of the political spectrum. Republican leaders find this program harmful to businesses and too restrictive as conservatives believe that  the government should not be regulating how a business chooses to operate. Democratic leaders don’t like that companies are subjecting price increases on their customers, causing more hardship than good; some democratic leaders think that there is not enough government control of the program, and that there needs to be even stricter regulations. Environmentalists see it as a form of progress but at a  bare minimum, and many more programs need to be implemented to make a meaningful difference. Eco-economists, like me, view the idea of the cap-and-trade market as a regulator. My own conclusions and opinions are not shared with eco-capitalists, but as of right now, the state of California can boast real reductions in their emissions, at the price of the citizens living there.

California has been implementing many other programs to help reduce carbon emissions and make the state a more sustainable place to live. Across the state, solar, wind, and hydro power energy alternatives have been implemented in order to pursue reusable energy alternatives, despite the fact that California is a well known oil producer. There is also a significant push for mandatory solar panel installations for companies and, as situations become more dire, there will be more reductions on water usage, making headway for sustainable agriculture in California.

Although my home state has many flaws, there are many people that are trying everyday to save this planet. Plastic usage reductions, white roads, renewable energy, sustainable agriculture are all good things that are in the works, but to make real change, we need to adopt environmentally friendly policy on a larger scale. The United States is one of the world’s largest polluters next to China. The United States and China are responsible for 40% of the world’s carbon pollution combined. It’s time the rest of the country steps up and takes even better action than the state of California has proposed.



Hiltzik, Michael. “No Longer Termed a 'Failure,' California's Cap-and-Trade Program Faces a

New Critique: Is It Too Successful?” Los Angeles Times, Los Angeles Times, 12 Jan.


Kasler, Dale. “California's Cap-and-Trade Program Is Costly, Controversial. But How Does It

Work?” Sacbee, The Sacramento Bee, 19 July 2017,

Schoen, John W. “Here's How US Carbon Pollution Stacks up with the Rest of the

World.”CNBC, CNBC, 31 May 2017,


California Air Resources Board. “Cap-and-Trade Program.” California Environmental Protection

Agency Air Resources Board,

“California Cap and Trade.” Center for Climate and Energy Solutions, 16 Mar. 2018,

“Permit Fees.” EPA, Environmental Protection Agency, 4 Apr. 2018,

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