California’s Cap-and-Trade: An Update

The European Union’s Emissions Trading Scheme was the first cap-and-trade program. It was designed to help its 27 member states meet their Kyoto Protocol commitments. These programs place a cap on emissions – which declines each year – and allows major emitters to buy and sell emissions credits to most cost-effectively meet the cap.


California’s Cap and Trade program was launched in 2012 with quarterly auctions. Then in 2014, California and Quebec officially linked their programs and there have been nine joint auctions since then. Cap-and-Trade is a key element of California’s plan to meet its aggressive greenhouse gas reduction requirements. The California Air Resources Board’s Scoping Study presented details on how the State will fulfill the requirements of the 2006 Global Warming Solutions Act.


To many, California’s Cap-and-Trade program is failing, “stumbling badly and facing an increasingly hazy future.” The program features quarterly auctions. In May 2016, only 2% of the auction’s eligible credits were sold, resulting in just $10 million for State programs, and of this, only $2.5 million for California’s notorious high-speed rail program. Projected revenues from this auction for high-speed rail had been $150 million.


Of the 96 million credits that went on sale for this most recent auction, only 30.8 million credits were sold. And of the total auction revenue of $390 million, only $8.4 million is available to support State programs. The rest of the auction revenues are directed to utilities to help buffer customers from the costs of paying for reducing carbon emissions.


At its launch there were great fears that the costs of credits would go sky high, resulting in bankrupt industries and other manufacturers in the State. But no, there are excess credits and insufficient demand for even CARB’s minimum price of $12.73 per ton of carbon emissions.


California’s program is not unique: Experts report that there is a glut of emissions credits in cap-and-trade programs around the world. And because of this, cap-and-trade is largely being seen as failure. The Governor, the legislature, and others had hoped to split up a very large pot of money to fund green initiatives. So is Cap-and-Trade failing in the Golden State?


Some experts say that while cap-and-trade’s revenues are not what were expected, more fundamentally, California is on track with its greenhouse gas reductions. This is good news… the most important and basic metric of all. There are at least two reasons for this success: First, much industry is gone and what’s left has not fully recovered from the recession. Second, another regulatory mechanism, the Renewable Portfolio Standard, is requiring utilities to cut carbon emissions, thereby reducing their need for allowances.


The result of the current state of cap-and-trade in California is that there is a lack of support to extend the program beyond 2020. Governor Jerry Brown wants to extend it to support the SB 32 goal of achieving a 40% GHG reduction from 1990 levels by 2030. But he got little support for this logic and SB 32 was silent on cap-and-trade. Potentially, the Governor will take cap-and-trade to the voters in the form of a referendum to keep it alive in California.