Researchers make recommendations to improve cap-and-trade program

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Researchers at UC Berkeley Energy Institute at Haas School of Business made recommendations in a study released Monday on improving California’s cap-and-trade program for greenhouse gases.

The researchers used greenhouse gas emission data from 1990 to 2011 to estimate emissions for 2013 to 2020, the time period outlined by the rules of the current cap-and-trade program, and then analyzed the data to determine changes that would make the market for emission allowances more stable.

The cap-and-trade program puts a limit on how much greenhouse gas firms are allowed to emit in a specific time period. Allowances to emit a certain amount of greenhouse gas can be sold and bought between firms.

The allowances are allocated by the California Air Resources Board, which created the cap-and-trade program and hired the researchers to conduct the study.

“The big picture is that it’s very likely that the allowance price will be at the price floor,” said Matthew Zaragoza-Watkins, a campus graduate student studying agricultural and resource economics, who helped author the study. “It’s also quite possible that the price could be somewhat high, and what’s surprising is that it’s unlikely that the price falls between the range of very low and very high.”

Too low a price would reduce the effectiveness of the program by decreasing the financial consequences for emitting greenhouse gases, and too high a price would require allocating more permits from the reserve, which researchers are concerned will be exhausted by the end of the program.

The study made two main recommendations — that the board ensure that it allocates enough permits to be released if the price hits the ceiling and that firms participating in the program be allowed to pay a fee to immediately use permits that are intended for later use.

According to Zaragoza-Watkins, the researchers have only spoken with staff at the air resources board, and not board members, about the study.

“Our job is to turn in the study. Now it’s in their court,” said Haas professor Severin Borenstein, who co-authored the study.

David Clegern, the air resources board’s public information officer, said there is ongoing public discussion over the study and that any potential changes would come through a staff recommendation to the board. He said staff is evaluating the study and have already considered variations on some of the recommendations.

Andrew Campbell, executive director of the Energy Institute at Haas, said the study was an opportunity for groups and companies interested in the success of the cap-and-trade program to push the air resources board to make improvements.

“There are hundreds of firms that are participating in the cap-and-trade program, and many public interest groups that have a vested interest in the outcome and design of the program,” Zaragoza-Watkins said.

Contact Anna Li at [email protected] and follow her on Twitter @annajxli.