California lauches Cap and Trade scheme

A quick update from overseas. The US state of California introduced it's carbon price on the first of January. California is using a cap and trade system (also known as an emissions trading scheme /ETS).

This action by California is important for a couple of reasons. Firstly, California is the most populous state in USA and it has a very large economy. In fact, if California was a country, it would be one of the ten largest economies in the world. Secondly, California has for a long time lead environmental action in the USA, so a successful emissions trading scheme there will help to push others states and perhaps the US federal government to take more action.

The Californian scheme is cap and trade. This is where the government caps the amount of carbon pollution that can be released into the atmosphere for each year and then large polluters have to buy permits to cover all the carbon they have released. This provides a financial incentive to reduce emissions and also makes renewable energy and "low carbon" goods and services more competitive.
In cap and trade, the cap is lowered over time, so less and less pollution can be emitted. Companies that need permits can buy them from companies that have reduced their emissions and so don't require them, providing a second way for business to profit from cleaning up their act.

How does this compare to the Australian carbon price? In its current (and introductory) form, Australia has a fixed price for pollution permits but the number of permits is not capped. This will change in 2015 when the scheme switches to emissions trading, very similar to what has now launched on California.

It is worth noting that in California many (but not all) of the permits are currently being given away to help business adjust to the scheme, although this will decrease as time goes on. It is worth noting that even when permits are given away there is still an incentive to reduce emissions because then you can sell your permits and make a profit. A similar process is occurring in Australia where trade exposed industries receive many of the permits (up to 95%) for free, although again this will decrease over time.