One simple trick for California’s carbon diet: a robust cap-and-trade system

Loren Kaye
President of the California Foundation for Commerce and Education

Almost every January 1st I set a personal goal for weight loss. That’s easy. The hard part comes the following 364 days while I try different strategies to shed the pounds.

On January 1, 2021, California must begin implementation of its ambitious goal to reduce greenhouse gas emissions 40 percent below the 2020 levels. This is the equivalent of cutting today’s per capita GHG emissions in half. No state or nation has ever attempted such an audacious carbon diet.

Since California will be breaking new ground, and since the effects on the state are asymmetric to the benefits enjoyed by the rest of the world (California emits less than one percent of global GHGs), state leaders have an extra obligation to pursue the least costly and least disruptive approach to implementation.

By common consensus, the most cost-effective approach to reducing carbon emissions is through a robust, economy-wide cap-and-trade program.

California has world-leading clean energy goals, and its industries are already among the most energy-efficient anywhere. Although the state has made great strides in reducing GHG emissions, many of those reductions were related to the renewable electricity mandate, existing energy efficiency programs, or the result of a long and painful recession.

The market-based approach of a cap-and-trade system provides regulated facilities with more flexibility and is less expensive to consumers than a command-and-control scheme. Cap-and-trade is designed to reduce emissions along a trajectory that will meet the 2030 goals; regulatory mandates cannot guarantee that outcome.

According to the nonpartisan Legislative Analyst’s Office, authorizing cap-and-trade beyond 2020 “is likely the most cost-effective approach to achieving the 2030 GHG target.” The Analyst compared the costs of a cap-and-trade program with command-and-control measures, and found regulatory mandates to be two- to ten-times more expensive than a market mechanism.

The new, more stringent 2030 goal will demand a more robust implementation strategy beginning right away; an extensive lead time is vital to create the efficiencies to adapt to this new regime.

Current authority for cap-and-trade expires in 2020, but markets and investors need assurance now that a market will be in place for the longer term.

A well-designed implementation strategy should be market-oriented to drive the best result at the lowest price.

  • Cap-and-trade should be the primary tool to meet the 2030 goals. Going forward, no new command-and-control regulations should be adopted.
  • The California Air Resources Board should have exclusive jurisdiction over GHG emissions in the state so that the regulated entities do not have to endure additional measures adopted by local regulators.
  • A cap-and-trade program should include cost containment measuresto minimize overall impacts to consumers and the economy, including:
    • A price ceiling to limit price spikes.
    • Continuation of audited offsets to reduce costs and encourage investment in innovative GHG reduction technologies.
    • Maintaining some free allowances to mitigate emissions and economic leakage (such as loss of jobs and businesses to other states or nations).
    • Transparency and accountability measures to ensure the program not only works for California, but will be replicable nationally and worldwide.

Moving forward with legislation adopted by a two-thirds vote will remove any legal uncertainty from the cap-and-trade program while allowing revenues to be raised for projects that are important to communities and constituencies around the state, including local programs to reduce or mitigate criteria or air toxic pollutants in disadvantaged communities.

Nobody likes dieting, but personal health and a longer life are worth it. Meeting the new California climate goals will be difficult and disruptive in the best of circumstances. By expeditiously adopting a cap-and-trade system, the Legislature will choose the least painful approach with the greatest prospect of success.

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