Covering the federal lawsuit challenging the constitutionality of the state’s cap-and-trade program, Rachel Becker of CalMatters spoke with Near Zero’s Danny Cullenward.

Under its cap-and-trade system, California doles out a limited number of pollution permits to major greenhouse gas emitters like heavy industry, electricity generators, and oil refineries. The state gives out some of these permits for free; others are offered up at auctions. Companies can also trade permits.

Over time, the number of permits the state issues dwindles — forcing companies to either cut their greenhouse gas pollution or buy and trade more expensive permits. “You can think of it as a game of musical chairs,” said Danny Cullenward, policy director at climate change think tank Near Zero. The idea is that over time, there should be fewer and fewer chairs offering companies refuge from actively cutting their emissions.

When California linked its cap-and-trade system with Québec’s in 2014, it increased the number of available chairs by allowing California companies to use permits issued by Québec to meet the state’s greenhouse gas limits — and vice versa.

Expanding the market increases opportunities to snag cheaper greenhouse gas reductions.  “A link says there’s more allowances,” Cullenward said. “And we’re playing this game together.”

Carbon-trading advocacy group IETA, whose members include Chevron, said in a statement “the Trump Administration’s complaint could force a loss of market-based efficiencies, potentially increasing the overall costs of carbon emissions across the two jurisdictions.”

In the short term, market prices for pollution permits have gone the opposite direction, and dropped since the Department of Justice’s announcement on Wednesday, according to Cullenward. “Unfortunately I would expect that market worries won’t be resolved soon,” he said. “Although I don’t expect an outcome so dramatic as a major collapse in demand, it’s conceivable that demand will weaken along with prices—and that means lower revenues.”

Experts knew there was a possibility that California might be forced to break up with Québec even before the federal lawsuit, according to Cullenward. “The risk that a hostile federal government could do this was well known to policymakers and key market insiders, even if many of today’s market participants were caught unaware,” he said.

That’s the challenge with a market-based system for cutting greenhouse gases. “Markets have a tendency to be skittish in the face of bad news,” Cullenward said. “California is no different.”

Read the full article, “Will fed’s lawsuit targeting California’s key climate change policy cost polluters and taxpayers?” by Rachel Becker, on the CalMatters website.