California cap-and-trade program, launched in 2013, is one of a suite of major policies the state is using to lower its greenhouse gas emissions. California’s program is the fourth largest in the world, following the cap-and-trade programs of the European Union, the Republic of Korea, and the Chinese province of Guangdong. In addition to driving emission cuts in one of the world’s largest economies, California’s program provides critical experience in creating and managing an economy-wide cap-and-trade system.
California’s emissions trading system is expected to reduce greenhouse gas emissions from regulated entities by more than 16 percent between 2013 and 2020, and by an additional 40 percent by 2030. It is a central component of the state’s broader strategy to reduce total greenhouse gas emissions to 1990 levels by 2020 and 40 percent below 1990 levels by 2030.
The cap-and-trade rule applies to large electric power plants, large industrial plants, and fuel distributors (e.g., natural gas and petroleum). Around 450 businesses responsible for about 85 percent of California’s total greenhouse gas emissions must comply. California has linked its program with similar programs in the Canadian provinces of Ontario and Quebec, meaning that businesses in one jurisdiction can use emission allowances (or offsets) issued by one of the others for compliance. This broadens the number of businesses under the cap, leading to additional economic efficiencies.
California Cap-and-Trade Details
California’s program represents the first multi-sector cap-and-trade program in North America. Building on lessons from the northeast Regional Greenhouse Gas Initiative (RGGI) and the European Union Emission Trading Scheme (EU ETS), the California program blends proven market elements with its own policy innovations.
The California Air Resources Board (CARB) implements and enforces the program. The cap-and-trade rules first applied to electric power plants and industrial plants that emit 25,000 tons of carbon dioxide equivalent per year or more. Beginning in 2015, the program was extended to fuel distributors meeting the 25,000-metric ton threshold. The program’s overall greenhouse gas emission cap declines by three percent annually from 2015 through 2020, and faster (details still to be determined) from 2021 through 2030. (See Figure 2)
Emission allowances are distributed by a mix of free allocation and quarterly auctions. The portion of emissions covered by free allowances varies by industry and by how efficient each facility is relative to industry benchmarks. These policy elements, and other relevant details of California’s cap-and-trade program, are summarized in Table 1 below.