Will California's cap and trade stifle low-carbon innovation?

Will California's cap and trade stifle low-carbon innovation?

When the state of California recently launched the milestone auction of greenhouse gas credits under its AB32 cap-and-trade program, the environmental world  and forward-thinking companies  applauded.

The program's long-term certainty should provide confidence for investing in carbon-reducing projects, level the playing field across fossil fuel and low-carbon energy choices, and boost California's climate leadership. At Chevrolet, we are encouraged by California's pioneering, economywide effort.

But what if cap and trade inadvertently stifles the innovative spirit  especially in energy efficiency  and replaces it with a lowest-common-denominator compliance mindset? Could cap and trade actually then make it harder to build a broadly based low-carbon economy?

More specifically, could a carbon market structure that awards to upstream utilities the carbon reductions generated by downstream energy efficiency investors have the unintended consequence of reducing investment in innovative, energy-efficient enterprises, and discourage entrepreneurs in the clean energy tech sector? If so, is there a solution? We think so.

Chevrolet's carbon conundrum

Through our Carbon Reduction Initiative, Chevy was the largest investor in the U.S. voluntary carbon market in 2011. We will continue to be a significant investor at least through 2014 as we work toward our goal of reducing up to 8 million tons of greenhouse gases through investments across the U.S. in renewable energy, energy efficiency and other innovative carbon reducing projects.

We've spent significant time and resources trying to identify carbon certified energy-efficiency projects to invest in that would support local communities; build a cleaner, more efficient energy infrastructure; and potentially power Chevy's Volt and Spark electric vehicles.

To that end, we have been exploring partnerships with California universities and others to develop methodologies that will allow energy efficiency investments to certify their carbon reductions and sell them in the voluntary carbon market. However, we've found it more complex in California, possibly an unintended consequence of California's cap-and-trade regulation.

Making all efficiency investments count

Under AB32's carbon cap design, universities and colleges that emit fewer than 25,000 tons of GHGs a year will not own the carbon reductions that their investments in energy efficiency will deliver. Instead, their upstream utility providers will have a presumptive claim on these carbon reductions, and their associated market value. The same claims would affect other institutions and businesses that might wish to make aggressive energy efficiency investments, and whose emissions were less than 25,000 tons a year.

One potential solution is for utilities, voluntarily or with encouragement from the state, to explicitly transfer the near-term carbon rights in question back to these universities and other small emitters, allowing those entities to then sell the carbon reductions to companies like Chevy that are investing in these pioneering efforts (and retiring the carbon to benefit the planet).

There is a clear, mutually advantageous, business case to support this approach: Such carbon funding could contribute up to a 50 percent return on the incremental capital required to spur these campuses' clean energy investments  while, beyond the market lifetime of these credit projects, the carbon value could profitably accrue back upstream to the utilities as reductions under their cap.

While California's cap-and-trade program is an important tool to reduce carbon emissions, absent a resolution to ownership of carbon reductions from implementing organizations below the emission threshold, it risks adversely impacting those voluntary, additive, innovative investments that are often driven by organizations working out on the leading edge of the clean energy economy.

Let's hope California's cap-and-trade program does not, paradoxically, subtract from the potential incremental reductions that can be supported by the voluntary carbon markets, but rather works in concert with voluntary markets and the innovative efficiency investments it supports.

This article was also co-authored by Angus Duncan, president of the Bonneville Environmental Foundation.

Smokestack photo via Shutterstock