California launching cap and trade

Come Wednesday, California will take its boldest, riskiest step yet to fight global warming, opening a market that for the first time will put a price on greenhouse gas emissions in the state.

The cap-and-trade system, six years in the making, will force owners of power plants and factories to buy and sell permits to spew carbon dioxide into the atmosphere. If trimming emissions without trashing the state’s economy works, it could be a model for the nation. If it fails, the fallout could doom federal climate-change legislation for years to come.

Under cap and trade, regulators set a limit on the amount of greenhouse gases the state’s economy can produce, lowering the limit bit by bit, year by year. Companies buy and sell permits, called allowances, to release carbon dioxide and other heat-trapping gases. As the cap drops, allowance prices should rise, giving companies a powerful incentive to rein in emissions. The first allowance auction takes place Wednesday.

The idea has been used since the early 1990s to cut the sulfur dioxide emissions behind acid rain, doing so at a far lower cost than critics predicted. But sulfur is relatively easy to control because most of it comes from power plants. Carbon dioxide, in contrast, comes from electrical plants, factories, fires, cars, planes — even human breath.

Still, other states and countries have tried to apply cap and trade to carbon. The European Union in 2005 created a greenhouse gas cap-and-trade system that now covers 30 countries, although experts remain divided over its success. And nine Northeastern states have a carbon cap-and-trade market, but it covers only power plants.

In Washington, congressional Democrats almost pushed through legislation two years ago to implement cap and trade nationwide. But the proposal died in the Senate, killed by Republicans convinced that global warming is either overblown or a hoax. Congress has refused to touch the issue ever since.

Now public concern about climate change is rising again, fueled by Superstorm Sandy’s rampage through New York and New Jersey. A smoothly functioning carbon market in California could revive federal interest, particularly if the system draws in other states or links with Europe’s market.

“We’d have a truly global cap-and-trade system, and that would shine the light on Washington and Beijing and other capitals to do something,” said Terry Tamminen, former secretary of the California Environmental Protection Agency under Gov. Arnold Schwarzenegger. He helped draft the state’s 2006 global warming law that led to cap and trade.

For the system to be judged a success, it must cut carbon emissions without saddling California businesses and consumers with higher costs. Success is hardly guaranteed.

A previous attempt to create a complex market, radically reorganizing the state’s electricity market in the late 1990s, ended in disaster. Traders at Enron and other firms discovered ways to game the system, driving up energy costs, triggering blackouts and forcing then-Gov. Gray Davis from office.

Some business groups have predicted similar catastrophes with cap and trade, saying the system will jack up prices for gasoline and electricity and send California companies fleeing to other states. Several business groups, including the Western States Petroleum Association, have launched a petition drive calling on Gov. Jerry Brown to halt the auction before it begins. He has declined.

Should their dire forecasts prove right, cap and trade would become too toxic for any American politician to try again. Other possible ways to address global warming at a federal level, such as a carbon tax, could be jeopardized as well.

“If California goes belly-up, we can all point to it and say, ‘See, we told you so,’” said Myron Ebell, the director of energy policy at the Competitive Enterprise Institute think tank who helped marshal federal opposition to cap and trade. “But that’s not a very gratifying option.”

“If it works, I’ll be amazed — a lot of people will be amazed,” he said.

dbaker@sfchronicle.com