Why We're Asking the Wrong Questions on Cap-and-Trade

With the launch of the Western Climate Initiative (WCI), California is putting its weight behind a regional cap-and-trade program scheduled to start auctioning carbon permits in 2012.

Modeled on the success of existing cap-and-trade programs in Europe and the East Coast, WCI partners would eventually represent much of western North America from Canada to Mexico, making it the largest regional cap-and-trade program in the hemisphere. It could determine the fate of climate change legislation nationally and globally.

The most common concern raised when discussing climate national or regional legislation is cost. Cost was used as a reason to thwart passage of a climate bill in the Senate, and now Texas oil companies are using the cost argument to suspend California's climate law, which would thus halt the cap-and-trade program.

Arguing over the minimal costs of cap-and-trade, however, keeps us focused on the impact to 1 percent of the economy, while ignoring the mounting costs to the entire economy of continuing to do nothing.

Simply put, we've been asking the wrong questions. Instead of asking how much cap-and-trade will cost, we should be asking how much it saves us -- in fuel, emissions, ecosystems, and money. The glacier in the room is that the real costs won't come from cap-and-trade, but from climate change itself.

Recent analysis by UC Berkeley professor David Roland-Host on the risks California faces from climate change detail the impacts to major sectors including water, energy, tourism, health, real estate, agriculture, and transportation. From shrinking snow pack to increased wildfires, severe storm damage, eroding beach property, reduced agricultural outputs, and premature death from heat exposure, pollution and disease -- the combined economic impacts of climate change for California alone could approach $10 billion a year. Literally trillions of dollars in assets are at risk, which is one reason the insurance industry is watching climate change legislation very closely.

Major companies such as Google, eBay, Levi's, Patagonia, Virgin, and Warner Bros. have come out in favor of California's climate change policy, which studies show would save money and improve the economy. The most recent economic analysis released by WCI in July, the proposed cap-and-trade program would provide net savings across the region of $100 billion by 2020 and spur long-term job growth. These cost savings are in addition to other benefits, such as improved public health, and economic development across a wide range of industries from investing in a cleaner, greener economy.

Even members of the fossil-fuel industry support cap-and-trade efforts. "Shell is a strong proponent of establishing a North American-wide cap-and-trade program, one that will eventually link up with international systems," Kimberly Corley, Shell's senior advisor on CO2 and environmental affairs, wrote in the company's comments on the WCI's mandatory reporting requirements.

Industry is both supportive of standardized protocols for reporting and verification, and, of course, concerned over the cost of compliance.

In its comments, Shell calculated compliance costs over the first three years as high as $800,000 per plant for new monitoring and verification procedures. With 30 plants in the Ontario province, where the companies' tar sands operations are largely centered, that represents a compliance cost of less than $10 million a year.

Even if compliance costs across the whole region were 10 times that at $100 million a year, we're talking about a company that generated profits of more than $4 billion just in the last quarter. In other words, the cost of compliance for the monitoring requirements is a fraction of the profits they make over a single weekend.

The additional cost of purchasing permits, of course, would depend on the politics in each jurisdiction -- primarily whether they were auctioning or giving away the permits -- the market price of carbon, and how fast industries can shift to lower-carbon technologies.