Energy Regulation: Cap and Trade and the effects on Energy Utility Rate Formula - Essay Example

The focus in this paper is on the Cap and Trade program is an energy regulation strategy adopted by California to reduce the greenhouse gas (GHG) emissions that cause climate change. The goal of this program is to reduce GHG emissions from 1990 levels that were very high, and achieve at least 40 percent reduction by the year 2020, and ultimately achieve an 80% reduction from 1990 levels by 2050. Companies are provided with an economic incentive to cut the carbon emissions during the manufacturing process.

Cap and trade sets a limit, a cap, which must be met by the companies. Companies have to purchase carbon credits, which are documents that allow a company to emit carbon to a certain limit. These are called California Carbon Allowance (CCA). California Air Resources Board (ARB) sells CCA. The number of permits that are sold to a company is fixed. If a company needs more permits, it has to purchase them from a company that requires less. Julie Cart stated that,“The complex market system for the first time puts a price on heat-trapping pollution by allowing California's dirtiest industries to trade carbon credits”.

Therefore, the overall number of CCA in the market stays the same because not too much is done. Some of the CCA might be given for free or at a lower cost. Carbon emitting companies have to reduce their emissions to be cost-effective. The need to purchase more carbon credits increases their costs. The entities that manage to stay significantly under the limit can sell the excess permits for a profit. The cap and trade program attempts to curtail carbon dioxide emissions by manipulating a price mechanism to which the markets respond4.

California is the first state in US to adopt cap-and-trade program. It was implemented from January 1, 2012. Cap and trade is an important step to curb climate change and global warming. Various political leaders have applauded the implementation of this law. Former Gov. Arnold Schwarzenegger said in a statement, “…adoption of a cap-and-trade program is a major milestone for California's continued leadership on reducing the world's greenhouse gases. the most critical phase in the fight against climate change is diligently, aggressively, and correctly implementing this law”5.

Why reduce GHG? Climate change is an eminent danger and must be tackled. Excessive emission of carbon dioxide contributes to the greenhouse effect. GHG have