Why California law, not the election, is a carbon game-changer

In the 2010 midterm elections, California voters put the state on a firm course to implement cap and trade. In those midterms, Californians elected a pro cap and trade governor (Jerry Brown) and, by a resounding 61 percent to 39 percent margin, rejected a ballot proposition designed to kill cap and trade.

That electoral labor bears fruit this month, when California holds its first carbon auction. According to the Governor Office’s estimate, California will collect in excess of $1 billion in the November auction. The California Legislative Accounting Office estimates that the carbon auction collections will range between $600 million and $3 billion for the 2012 auction, with collections ranging from $2 billion to $14 billion annually by 2015-16.

Because of a number of factors, California’s experience with cap and trade, and not the outcome of this week's presidential election, will determine whether our nation implements a federal cap-and-trade program in the next four years.

With its size and complexity, the California market — home to 1 in 9 Americans and the eighth-largest economy in the world — provides a very credible laboratory in which to vet whether our nation can use the cap-and-trade market mechanism to address the climate change challenge. Should California succeed in using the billions collected to prevent the economic dislocation that some predict will be inflicted by cap and trade, the California experience will validate that cap and trade will work at the federal level.

One American that will be paying close attention to the results in California will be the president, whoever it is. And there is good reason to believe that if cap and trade succeeds in California, federal cap-and-trade legislation will be inevitable by 2016, regardless of the results of the 2012 presidential election.

Next page: The incumbent and the challenger

The Incumbent

For a re-elected President Obama, a federal cap-and-trade program represents the kind of game-changing, legacy-creating legislation that all second-term presidents justifiably crave: a market-based solution to the climate challenge. Once re-elected, and assuming that the November elections fail to deliver to the Republicans the 60 Senate votes needed to break the congressional paralysis, we can expect President Obama, through the Environmental Protection Agency (EPA), to continue the drumbeat of ever-increasingly burdensome regulation on greenhouse gas.

By 2014, this regulatory pressure will cause industry to press their elected representatives to put in place a federal cap-and-trade program that replaces the regulatory mandates with a market-based program. In this scenario, a successful implementation of cap and trade in California will be pivotal because it provides Congress with both a model to follow and the validation that will be desperately needed to calm jitters about the potentially disruptive effect of such legislation. Net result: Cap and trade by 2016.

The Challenger

For different reasons, the result would have been precisely the same under the first term of a Romney administration. Notwithstanding Governor Romney’s tilt to the right during the primary season, his record on climate is moderate. He has publicly acknowledged his belief that humans have played a role in the creation of global warming and has declared the need to address global warming irrespective of the degree of scientific unanimity.

In 2004, as Governor of Massachusetts, Romney introduced “no regrets” climate legislation that committed the state to reduce greenhouse gas emissions to 1990 levels by 2010. This “closet moderacy” on climate, coupled with his knowledge of the market and belief in market-based solutions, would pre-dispose a President Romney favorably to a federal cap-and-trade solution — as long as California cap and trade succeeds.

In the Romney scenario, predisposition would move to action by 2014, as President Romney would be planning for re-election. By securing passage of a landmark, market-based cap-and-trade program, Romney would provide “market-based” Republicans a “least worst” solution to the climate problem and garner for himself the precious support of moderates that he would undoubtedly need to win a second term in office. Net result: Cap and trade by 2016.

Of course, if California fails to demonstrate that the billions raised can be used to prevent economic dislocation, federal cap and trade may be dead. Once again, as was the case in 2010 when Californians were asked to decide the fate of the California cap-and-trade program in the mid-terms elections, it’s showtime in the Golden State.