1. California
Cap and Trade
Lessons from Kyoto for the Future
David Ulrick Fanfan
July 25, 2013

2. A Great Unifier
• "We're in one world. We've got one big problem and we'll all
have to work on it. And what's beautiful and exciting about
climate change is no one group can solve the problem - not
the United States, not California, not Japan, not China - we all
have to do it. This is a great unifier."
California Gov. Jerry Brown – UC Berkeley Class of 1961

3. Contents
History and
Background
Kyoto
Emissions
Trading
System
California Cap
and Trade
Linkage and
Moving
Forward

4. History and Background
- Executive order by U.S. President Richard M. Nixon to
form the the United States Environmental Protection
Agency (EPA).
The EPA’s mandate was to set
standards on the emissions of CO,
NO2, SO2, Hydrocarbons (CH4 and
C3H8), particulate matter (PM such
as NO-3 and SO2
-4), and
photochemical oxidants (O3)

5. History and Background – cont.
- Command-and-control approach did
not provide the environmental
certainty necessary for serious carbon
reductions.
- U.S. President George H. W. Bush
proposed legislation that would
establish the acid deposition control.
To reduce NO2 and SO2 by 50% of 1980 levels by 2000 through a market
based initiative.
EMISSIONS TRADING

6. History and Background – cont.
- Caps took effect in 1995
- Phase 1 – started in January 1, 1995 (identified 110 power
generating plants)
- Phase 2 – started in January 1, 2000 (all fossil fired units)

7. History and
Background –
cont.
- The first emissions
trading program
was remarkably
successful in
accomplishing
environmental
goals.
- Reduced acid rain
concentrations by
over 50% in just 10
years.

8. Kyoto – European Union Emissions Trading System
- U.S. President George H. W. Bush signs
international treaty - countries will
consider how to limit the rise in global
temperatures and the resulting climate
change. – Rio Earth Summit 1992
On December 11, 1997, UNFCCC adopts the Kyoto
Protocol in Kyoto, Japan. – signed by U.S. Vice
President Al Gore.
Under U.S. President George W. Bush,
The United States refused to ratify thus
removing the world’s largest carbon
polluter at the time from the agreement.

9. Kyoto – European Union Emissions Trading System
- Caps and credits just like Acid Rain program
- Countries and their historical role in carbon
pollution were identified rather than just
power generation plants.
• Divided into Annex 1, Annex 2 with binding targets,
• Developing countries with non-binding targets
Flexible
Mechanisms
Joint Implementation: Annex 1  Annex 1 or 2
Clean Development Mechanism: Annex 1 
Developing Country
International Emissions Trading: Annex 1 TRADES with
Annex 1 or 2

10. Kyoto – European Union Emissions Trading System
Noticeable drop in carbon emissions since implementation. (Some blame recession)
http://wattsupwiththat.com/2011/11/09/what-hath-kyoto-wrought/

11. Kyoto – European Union Emissions Trading System
Others call it a failure because China and developing nations increased pollution.
http://www.mpg.de/6678112/carbon-dioxide-climate-change

12. Kyoto – European Union Emissions Trading System
- Trade allowed on the secondary markets into investment portfolios.
- Flexible mechanisms led to even greater COST UNCERTAINTY.
- Price of 1 ton of Carbon Dioxide did not prove profitable for investors
although environmental goals were achieved.
- Price collapse when excess of permits revealed (BLUE)
- Sensitive to global recession that brought demand down. (RED)

13. Kyoto – European Union Emissions Trading System

14. California Cap-and-Trade: Lessons Learned
- Same as before: Caps, credits, emissions trading between polluters and pollution
reducers.
- Reduce total GHG to 1990 levels by 2020.
- Compliance took effect January 2013 – large electrical power plants and
large industrial plants. In 2015 extends to fuel distributors.
- Covers 360 businesses and 85% of the California’s GHG emissions.
- Differences from KYOTO:
- Limited to regulated emitters on the open market. And banks as
participating entities for future use.
- Credits allocated based on normal business’s operating production rather
than historical pollution (which rewarded the heaviest emitters)
- Stricter compliance officers for verifying offset projects.
- Establishes price floor of $10 with 5% over inflation increase annually.
- Set limits on the amount of offsets can be used (8%)
http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm

15. California Cap-and-Trade: - cont.
MMT CO2e = Million Metric Ton of Carbon Dioxide Equivalent
2009 was the peak – total emissions started decreasing since then.

16. California Cap-and-Trade: - cont.
Ref. California Cap and Trade Program Summary – Center for Climate and Energy Solutions
Jan. 2013

17. California Cap-and-Trade: - cont.
Ref. California Cap and Trade Program Summary – Center for Climate and Energy Solutions
Jan. 2013

18. California Cap-and-Trade: - cont.
Ref. California Cap and Trade Program Summary – Center for Climate and Energy Solutions
Jan. 2013

19. Linkage and Moving Forward
Main problem with linkage is the uncertainty in the price of carbon dioxide.
Policy and regulation differences can easily be
considered when looking for price conversion
factors among regional cap and trade
programs.
Cost abatement factors for corporate entities
and businesses is a major factor in the price
sensitivity for CO2.
Therefore focusing linkage
on manipulating the price is
key.
Recommendation

20. Linkage and Moving Forward – cont.
Federal governments and international organizations (UN, Arab League, etc.)
with advice from knowledgeable personnel in their respective central banks
should be allowed to purchase those credits for conversion into other cap-
and trade-programs based solely on monetary value.
Will bring outside revenue to the State
especially in times of recession.
- Subject to currency risk (Downside)
Price floor at $10 brings some form
of economic certainty similar to a
carbon TAX.