New Environmental Standards.

Legislators in the state of California set a new standard for the regulation of greenhouse gas (GHG) emissions in the United States yesterday. Having reached a compromise with the relevant party leadership, Governor Arnold Schwarzenegger put a new bill before the state Senate that calls for a radical departure from the established approach to global climate change in the world's 10th-largest economy. According to the Los Angeles Times and other news sources that have carried these developments today, the new bill passed by 23 votes to 14, with state Democrats offering their support and Republicans opposing the measures. Although it awaits endorsement by the state Assembly before it can be enacted, a new era of environmental regulation in California's energy sector has been ushered in.

According to the new bill, California's large source GHG emitters will have to reduce the carbon dioxide they produce by 25% over the next 14 years. This has been estimated to represent 147 million tons of carbon dioxide that would have otherwise been produced between now and 2020. According to Bloomberg, the bill will cover the energy-use activities of California's leading utilities, such as the PG&E Corp. and Edison International, and the state's extensive up- and down-stream oil sector with operators such as BP and Chevron, as well as other as-yet-unnamed large source GHG emitters.

The governor issued a statement in which he expressed his pleasure with a bill that will allow the state to "move forward with developing a market-based system that makes California a world leader in the effort to reduce carbon dioxide emissions."

Perhaps most importantly, California's new framework puts a cap on GHG emissions—a first for the United States, and a position that breaks with the federal government's established approach of voluntary measures and flexible targets based on energy intensity. Moreover, the strong endorsement of a cap-and-trade system for carbon dioxide, methane, and nitrous oxide also breaks new ground, not least because of the scale on which it will operate in California. Further details of the execution of the bill will be eagerly awaited, especially the distribution of emissions allocations among the industries covered. Still, the commitment offered is nothing short of remarkable. Governor Schwarzenegger certainly has Democratic constituencies and this year's election in mind with the weight he has thrown behind the bill, but that does not detract from the lasting importance of the bill he has championed. Some might have wanted more, but seen alongside the pieces of legislation that tighten the regulatory structure that surrounds the state's transport structure, namely fuel economy and emissions standards, the governor is emerging as a surprising environmental champion.

Outlook and Implications.

Expectedly, the few comments issued by industry reflect concerns over increased costs and job losses. The allocation process will be a challenge for legislators, as they must strike a balance between environmental effectiveness and economic competitiveness. If the mix is too severe in favor of the former, then companies may choose to seek out more forgiving regulatory frameworks in other states, taking their jobs with them. On the other hand, as recent experience in the European Emissions Trading System has shown, too lenient an allocation program undermines the GHG emission reduction sought. This test holds the added weight of raising expectations elsewhere in the United States, and around the world. Although other states have taken it upon themselves to introduce new approaches to climate-change regulation, notably the collaboration among northeastern states—including New York and New Jersey, which have set the goal of reducing the carbon dioxide produced by their power plants by at least 10% over next 10 years—California's initiative holds wider relevance. If the efficacy of the cap-and-trade system is convincing there, it will likely inform more thoroughgoing regulatory initiatives elsewhere.

California's actions have already put the merits of the federal government's approach to the test. More states signing up to intervene more aggressively in their energy markets for the socially desirable outcomes linked to reduced GHG emissions could well prompt a shift at the national level of the sort upon which a more effective global response to global climate change might be built.