On the Verge of Collapse: Falling Demand for Carbon Permits in California's Failing Cap-and-Trade Program

It's not working.

Unexpectedly!

At the Los Angeles Times, "California's cap-and-trade program faces daunting hurdles to avoid collapse":

California's cap-and-trade program is on the verge of collapse https://t.co/2hkkXC8iDl pic.twitter.com/JIo3pnu7Dx

— Los Angeles Times (@latimes) June 14, 2016

The linchpin of California’s climate change agenda, a program known as cap and trade, has become mired in legal, financial and political troubles that threaten to derail the state’s plans to curb greenhouse gas emissions.

The program has been a symbol of the state’s leadership in the fight against global warming and a key source of funding, most notably for the high-speed rail project connecting San Francisco and Los Angeles.

But the legality of cap and trade is being challenged in court by a business group, and questions are growing about whether state law allows it to operate past 2020. With the end of the legislative session in August, Gov. Jerry Brown, lawmakers and interest groups of all stripes are laying the groundwork for what could become a battle royal over the future of California’s climate change programs.

Unless the state acts, “the whole system could fail,” said Senate leader Kevin de León (D-Los Angeles). “If that happens, we could lose an entire stream of revenue to make our communities more sustainable.”

California received an unwelcome reminder of cap and trade’s precarious situation last month.

The program functions by capping how much greenhouse gas can be emitted into the atmosphere and requiring companies to obtain permits, each allowing 1 metric ton of emissions. Those permits can be purchased at auctions or traded in a market, a system intended to provide a financial incentive for businesses such as power plants, oil refineries and manufacturers to reduce emissions.

By selling the permits, the state generates revenue that can be spent on other initiatives that reduce greenhouse-gas emissions, such as weatherizing homes and helping low-income residents buy cleaner cars. The bullet train is the biggest recipient, getting 25% of the cap-and-trade funds.

During the most recent auction in May, only 11% of the permits offered for sale were purchased.

Analysts suggested that legal uncertainty around cap and trade has damaged faith in a system that, like other markets, requires investors’ confidence to operate smoothly. They also said corporations and speculators are holding more permits than currently needed to cover the amount of greenhouse gas emissions in the state, a supply-and-demand problem that has been growing in every auction over the last year and could continue to choke revenue through 2017...

Oh, it's a "supply and demand" problem. Who could have predicted that? Not California's Marxist economists, who no doubt ignored neoclassical economic theories in their statist models of environmental regulation. Note though, when you get the fundamentals wrong, it's likely you'll get the entire state-led regulatory structure wrong. Actors in the economy respond to signals and incentives, and when they see the system's built-in disincentives to participation, they'll exit the program, sit on the sidelines, and wait for better business opportunities.

That's how markets work, come to think of it.

Still more.