California marks first anniversary of cap-and-trade

In the year since California launched the nation’s largest greenhouse gas cap-and-trade program, the state has proven that climate change action can be led by states and can even spread across national borders.

Under a cap-and-trade system, companies must hold enough emission allowances to cover their emissions, and are free to buy and sell allowances on the open market. Since California held its first auction of carbon allowance credits on Nov. 14, 2012, the California Air Resources Board (CARB) has auctioned roughly 64.4 million allowances valued at $780 million. Through the smooth operation of its auctions and sales of 100 percent of 2013 allowances to date, California has demonstrated its capacity to successfully administer a cap-and-trade program.

California does not have the first emissions trading program in the United States, although it’s certainly the most ambitious. The multi-state Regional Greenhouse Gas Initiative (RGGI) was the pioneer, but California’s cap-and-trade program is more substantial due both to the size of state’s economy and the number of sectors covered. By 2015, California’s program will expand to be about twice as large as RGGI.

California has also stepped into the realm of regional and transnational efforts to curb greenhouse gas emissions. In the absence of a comprehensive national climate policy to limit these emissions, California has formed a series of important partnerships over this past year, including:

  • A formal agreement with Quebec to officially link cap-and-trade programs starting Jan. 1, 2014. This agreement will provide greater flexibility to covered entities in California and Quebec by authorizing the exchange of allowance credits between each jurisdiction to satisfy compliance;
  • A non-binding agreement with Oregon, Washington state and British Columbia to establish a regional climate plan, anchored by a multi-jurisdiction greenhouse gas emissions trading program. The agreement, chartered under the Pacific Coast Collaborative, also calls for increased deployment of clean energy and implementation of long-term greenhouse gas emissions targets;
  • A formal agreement with China’s top climate agency, the National Development and Reform Commission, to strengthen industrial and power-sector emissions performance standards, and to help China implement municipal emissions trading pilot programs.

Although the first year of California’s cap-and-trade program has been successful, strategic questions remain as the state pursues its long-term greenhouse gas goals. One issue policymakers must address is the state’s relative reliance on targeted, sector-specific policies such as the Renewable Portfolio Standard (RPS) and the Low Carbon Fuel Standard (LCFS), rather than the economy-wide, market-based cap-and-trade program. An analysis by Thomson Reuters Point Carbon suggests that abatement from these complementary measures will reduce demand for allowances below CARB’s projections, to the point that the auction price will soon drop to the floor price and remain there for several years. While this would result in lower cap-and-trade compliance costs, it suggests that California may be leaning too heavily on its complementary measures, which can be more costly than cap and trade. Put another way, California’s other policies are projected to be so successful that the declining carbon cap will drive nominal additional cuts, at least in the near-term.

California policymakers should reassess whether the right balance is being struck between complementary measures and cap and trade. On one hand, complementary measures are used to drive innovations and emission reductions in nearly every sector. On the other, cap and trade is more economically efficient overall because it pushes regulated entities to look for the lowest-cost reductions rather than specific cuts required by regulations, such as in fuel carbon intensity required by the LCFS.

California’s cap-and-trade program is driving real emission reductions while expanding its clean energy market. At the same time, the state’s programs are serving as models to be emulated by other states, provinces, and nations. Although one year is not enough time to deem cap and trade a success in California, we can certainly say it is off to a promising start.