When Assembly Bill 398 (Garcia, E) was signed into law last year to extend California’s landmark greenhouse gas cap-and trade carbon market through 2030, it directed the California Air Resources Board (ARB) to modify the program’s cost containment mechanism. The intent of AB 398 is for ARB to develop safeguards that will help regulate the cap-and-trade market, anticipate program problems and ensure market stability.

Legislators specifically directed ARB to incorporate two components into the regulation: develop a carbon price ceiling that creates more certainty in the market, inviting greater investment in new technologies that reduce greenhouse gas emissions; and incorporate two intermediate price containment points to contain costs and protect against sudden price spikes.

ARB now is considering how cap-and-trade will be implemented from 2021 through 2030. As it proceeds, agency staff and leaders need to create a price ceiling structure that moves the environmental objectives of the program forward while protecting California’s economy.

The most reliable basis for setting these ceilings and price points prices is the social cost of carbon – the dollar value of the economic damage from the impact of each ton of carbon emitted. This quantifiable measurement helps governments and businesses worldwide guide policy decisions on reducing greenhouse gas emissions.

Unfortunately, the new amendments under ARB review through the year 2030 would dramatically increase both the projected price ceilings and the intermediate levels.  The price structure now being considered could jeopardize the cost-containment safeguards, prevent proper market oversight and potentially increase market volatility. Short of an emergency action by the governor, failure of the built-in safeguards is much more likely to occur, jeopardizing the entire program.

In establishing the new price structure, ARB must respect the clear intention of the Legislature in AB 398 to protect individual California consumers, businesses and the economy against adverse impacts as they help to advance the state’s greenhouse gas reduction goals. The cost containment program also must work to prevent both environmental and economic “leakage.”

Leakage on either side of the spectrum harms California’s overall climate change policy goals.  Businesses could leave California for other locations with less stringent greenhouse gas regulations and carbon mitigation costs. The result would be the greenhouse gas emissions would simply transfer to a different state or nation and the employment infrastructure those businesses provide will also be reduced or completely eliminated. California also becomes a less attractive model for other states and jurisdictions to become partners in our cap-and-trade system.

A volatile market increases the likelihood that businesses and industries will need to pay much more for the carbon credits that help offset their contribution to greenhouse gases.  Those costs will pass through to millions of California consumers in the form of much higher costs for fuel, goods and services.

That original greenhouse gas legislation, Assembly Bill 32, required CARB to create regulations “to achieve the maximum technologically feasible and cost-effective greenhouse gas emissions reductions.” This enabled creation of the state’s successful and lucrative cap-and-trade program to capture and sequester carbon and reduce greenhouse gas emissions.

Experience demonstrates that a well-designed cap-and-trade program effectively reduces carbon emissions. Unfortunately, the proposed dramatic escalation in the cap-and-trade carbon trade pricing provisions through 2030 could have serious repercussions for consumers, businesses and the economy.

The majority of stakeholders in this process have made strong, technically justified cases to ARB for a lower price ceiling and the implementation of cost containment points. As configured, the current model ARB is considering puts the program and the state’s economy at unnecessary risk.

The Climate Change Policy Coalition (formerly the AB 32 Implementation Group) is comprised of large and small businesses from throughout California that provide hundreds of thousands of jobs in our state and around the world. Our mission is to be a constructive voice in the process of ensuring California meets its ambitious climate and clean air goals, while still protecting consumers, jobs and the economy.