California’s cap and trade system is reshaping the entire energy landscape of the American West. Amendments to the state’s ground-breaking 2006 greenhouse gas permit trading program require all electricity imports to California to meet strict, in-state regulatory standards. Utah is among the handful of states that will be impacted by California’s climate change initiative. If you aren’t familiar with the cap and trade system in California, here is a brief run-down.
AB 32, aka the California Global Warming Solutions Act, established California’s cap and trade program in 2006. The program, which launched in 2013, aims to combat climate change by reducing state carbon emissions to 1990 levels by 2020. California’s large electrical and industrial (and later, fuel) distributors were initially awarded a marginal, base number of free carbon permits. Once those have been exhausted the companies must purchase carbon permits at quarterly auctions held by the state. Each permit corresponds with a specific, “capped” tonnage of carbon that may be emitted into the atmosphere. The total number of carbon allowances sold at auction declines each year. AB 32 thus incentivizes the state’s major polluters to come up with new strategies for reducing their greenhouse gas (GHG) emissions annually. If a company reduces emissions to less than its permitted amount, it can turn a profit by selling excess allowances at the open-market auction. If a company produces more than its permitted tonnage of GHGs, it is forced to purchase additional permits or suffer state-imposed consequences. This is the “trade” aspect of cap and trade.
Additionally, companies may purchase offsets that count towards a maximum of eight percent of their total emissions. Offsets are essentially any investment that indirectly reduces carbon emissions, or effectively absorbs carbon from the atmosphere. For instance, a company could purchase a plot of forested land with the promise to protect it from resource extraction, thus ensuring that the forest will absorb atmospheric carbon for a given period of time.
The efficacy of the cap and trade program is debatable. Many environmentalists argue that the system simply justifies pollution, and is not a viable long-term solution to climate change. Personally, I tend to agree. However, I also recognize that cap and trade is currently the only game in town aimed at economically discouraging carbon pollution, while also encouraging a transition to renewable energy sources. This is important, as a similar system could eventually be implemented in Utah.
California’s carbon emission reduction requirements for electricity imports into the state will spur a scramble to develop clean energy among western utilities competing to maintain their share of the California energy market. Inevitably, some states are going to fall behind in this race to transport cleaner electricity to the Golden State, leaving a highly profitable void to be filled by the more progressive and aggressive developers of alternative energy. The Utah energy sector is, to my mind, at a momentous turning point. It can either seize this opportunity and surge ahead of the crowd, or it can fight the future, drag its feet and get left behind to choke on the dust of its more enlightened competitors.
Currently, more than four-fifths of Utah’s electricity is generated by burning coal, the dirtiest and cheapest form of fossil fuel. While this contributes to some of the cheapest retail electricity rates in the country, it also puts Utah behind the curve when it comes to clean energy production. If Utah were to shift away from coal, towards cleaner sources (preferably renewables), it would be able to capitalize on the legally guaranteed growing demand for such energy in California — at the expense of marginally higher in-state energy costs.
It should be noted that California’s cap and trade program is slated to end in 2020. However, politicians in the state are already discussing emission reduction goals for 2050, leading one to believe that the demand for clean/renewable energy is not going to end anytime in the near future. Whether precipitated by climatic concerns or simply by the exhaustion of our finite reserves, the epoch of fossil fuels is eventually going to end. Thus, those who argue that investing in renewables is a shaky gamble — given the currently low costs of fossil fuels and the apparently uncertain future of clean-energy-promoting policies — would do well to readjust their time horizon.
Utah is one of only eight states that possess the potential for utility-scale geothermal energy production. Geothermal is a unique renewable source of energy, and one of the largest sites in the state is conveniently located near an existing electricity transmission line to California, in the Black Rock Desert basin. Geothermal is a more reliable energy source than wind and solar, and could prove to be cost competitive with coal. Unfortunately, Utah’s political leaders are afflicted by a severe case of short-sightedness, and are rendered blind to the reality that renewable energy is the future.
California’s cap and trade system is merely a foreshadowing of what is to come in America’s economic and energy future. The country, and the world, are beginning to evaluate the true costs of carbon-intensive energy production, and the assessment that is taking shape does not look favorable for fossil fuels. Utah, blessed as it is by its proximity to a huge renewable energy market, and with an abundance of renewable energy production potential, could easily emerge as a huge winner in the looming economic evolution.