Sheldon Zakreski, The Climate Trust
Weekly Policy and Finance Update – June 26, 2017
California has been intensely debating what an extended cap and trade program will look like when the current version expires in 2020. And there’s been no shortage of proposals on what it should look like. Industry, environmental justice advocates, and academics have all put forward ideas for tweaking the program. Both the Assembly and the Senate have introduced different bills. To date, none have gained the traction to earn a two-thirds vote necessary to ensure the extended program won’t be subject to legal challenges. Although Democrats hold the necessary seats to approve any bill with two-thirds of the vote, the political dynamics have been such that state Republicans could have a role to play in shaping a future cap and trade program. But a new proposal from Governor Brown, could have the legs to pass.
Rather than a grand design of cap and trade, as some had hoped for, the proposal is largely an extension of the current program with some important updates. A price ceiling and two price containment levels will be set. These elements are intended to prevent the possibility of sudden and sharp carbon price spikes. While carbon prices have been on the low end to date, there is the potential for runaway carbon prices in the post-2020 market has complementary policies capture the easiest reductions, while the cap on emissions becomes more stringent.
The plan also proposes to adjust the offset usage limit and encourage an increase in California-based offset projects. While our analysis shows approximately 42 percent of offsets surrendered by compliance entities originated in California, the mere act of establishing a long-term market with price transparency will go a long way to increase the supply of California-based offsets. To this end, perhaps the biggest challenge with the proposal for the carbon market is that it only extends some market certainty for another 10 years.
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