Wednesday, April 12, 2017

Market Mechanisms for Market Failures: Part I

[In todayʻs posting, we return again to the historic roots of Californiaʻs pollution trading scheme (aka AB 32, the Global Warming Solutions Act) and the many hard-won regulatory laws that preceded it. This history becomes important as a lens for understanding the contemporary politics of fossil-fuel induced crises, including the current push for deregulation by the Trump regime.]

The rising alarm surrounding air pollution during the 1960s lead to the passage of the Clean Air Act in 1970. The essential mechanism of the Act was to establish limits on the release of harmful air pollutants, which principally affected auto manufacturers, refineries, and heavy industries. The regulatory requirements of the Clean Air Act were largely aimed at technological changes, including filters to remove recognized pollutants and meet air quality standards. “By 1991, however, the Environmental Protection Agency had succumbed to the pressure of lobbyists demanding lax enforcement of the Actʻs rules or regulations associated with expensive emissions equipment. EPA targeted Southern California to test a plan that would potentially increase healthy air while reducing emissions by offsetting the cost of pollution controls ….The pilot project, called Regional Clean Air Incentives Market (RECLAIM) established a system for trading ʻpollution creditsʻ among polluters.”

While the authors of AB 32 pointed to an East Coast emissions trading program to limit CO2 emissions (RGGI) as an illustration of how cap-and-trade might operate, RECLAIM was a much closer approximation to the broad contours of the Solution Act. It is likely that the sponsors of AB 32 did not want to point to RECLAIM for one simple reason: it was “widely regarded as a failure due to the issuance of too many emission credits, resulting in weak prices.” Initiated as one of the earliest programs for emissions trading, RECLAIM faced challenges from the start. “Companies had an incentive to achieve escape routes (e.g., variances granted by local air districts) from caps placed on emissions.”

From its inception,  the Los Angeles Incentives Market (RECLAIM) confronted intensive scrutiny from community-based organizations. Communities were already suspect of the basic premise that pollution trading from oil refineries, rail traffic, and other industrial facilities would not impose an even greater threat to their well-being. Various community groups viewed the entire premise of providing regulatory flexibility to the private sector with a blunt skepticism, particularly regarding the benefits of a pollution-trading scheme designed by those working from office towers in New York, Washington, D.C., or San Francisco. The suggestion that they should join with national environmental groups who had designed AB 32 yielded open hostility among a large number of community-based groups in Los Angeles, “This wouldn’t be the first time that they threw us under the bus!”

Another controversy enveloping the proposed trading scheme related to  
what many public health officials referred to as ʻold scienceʻ versus ʻnew science.ʻ Early trading schemes such as RECLAIM emerged during an era when trading was founded on an already dated characterization of ʻpollutantsʻ as chemical hazards posing principally short-term harms. By the beginning of the 21st century, newly emerging scientific findings included a much broader array of harms, reflected in an expanded set of statutory terms (e.g., neurotoxins, microparticulates, endocrine disruption). Because the harms recognized latent effects impacting multiple generations, sometimes at exceedingly small exposures or other times based only the timing of exposures (i.e., first trimester for reproductive effects) legislative discussions moved from how to manage chemical exposures to a more pointed effort simply to eliminate the commercial production or release of substances posing inherent hazards.

Whereas various federal laws were firmly planted in an older model allowing private sector firms to release uncharacterized chemicals into the environment, public health officials and others conversant with these new scientific findings advanced precautionary approaches in law. By the early 2000s precautionary legislation became especially popular in California, with many calling for the rapid phase-out of various products containing bio-accumulative, biologically disruptive, and other such substances (e.g., mercury, lead, PBDEs). The operating premise for a variety of these laws was to prohibit the production, use and sale of substances posing inherent hazards. Lacking this preventative premise, the framing of the Global Warming Solutions Act, therefore, was instantly contentious.

A fundamental question confronting the Legislature turned on how to construct AB 32 within the framework of existing laws, and pointed to very divergent paths. Inside the Legislature, the question pivoted on whether to incrementally manage the release in a calculus of what was most efficient for business. The new research emerging was predicated on the urgency to eliminate these substances posing known and dramatic threats to human life and civilization extending for centuries into the future.

In the years following the enactment of Californiaʻs Global Warming Solutions Act, the question of whether the State should utilize market mechanisms to address a crisis precipitated by what many economists labeled ʻthe greatest market failureʻ would become a pivotal question. In 2017, the question would become dramatically more significant in the context of President Trumpʻs swiftly adopted agenda to dismantle strict regulatory controls, particularly with respect to any restrictions over fossil fuels.

And for readers who are forgiven for not following the minutia of market mechanisms, one additional event in 2017 yielded one more over-looked commentary on the failure of market mechanisms: the decision by the South Coast Air Quality Management Districtʻs Board to terminate the decades-old regional pollution-trading program: RECLAIM. Sparing readers the interesting details, it is enough to note that one of the Board members, the Honorable Sheila Kuehl, noted that Los Angeles was bringing an end to being gamed by fossil fuel interests; LA would revert to the reliable and certain results achieved by strict regulatory controls over emissions by petroleum refineries and other large emission sources.

I promise to provide a less wonky posting next time!

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