Offsets are a Core Element in California’s Cap and ‘Invest’ Program
Recent proposals to extend and revise California’s Cap and Trade program demonstrate the importance of maintaining effective policies that deliver critical funding to climate mitigation projects. Governor Gavin Newsom’s May Budget Revision proposes renaming the program “Cap-and-Invest”, along with spot bills AB 1207 , SB 840, and a trailer bill, supporting an extension of the program with amendments. Reflecting on the program’s accomplishments over the past decade, its continuation is essential to achieving California’s ambitious climate goals of reducing emissions to 40% by 2030 and 85% by 2045, and advancing a carbon neutral economy [1].
National and Global Leadership
The Cap and Trade program has proven to be a flagship example of California’s climate leadership both inside and outside the state – by allowing offset projects to take place in other states, and by developing a GHG compliance program that has been replicated in other parts of the world. Offsets can be generated from Air Resource Board (ARB) approved projects including: Methane Destruction, Agricultural Reduction, Ozone Depleting Substances, and Forestry Projects [2]. Not only are California communities benefiting from emissions reductions in their neighborhoods, but so are communities across the country where offset projects can deliver industrial innovation and nature-based solutions that would not have otherwise occurred.
Cost Containment
In comparison to allowances, which give firms the right to emit a set amount of emissions, offsets offer a more affordable way to meet GHG compliance obligations. To ensure firms are held accountable in reducing their own emissions, there currently is a required 4% cap on offset use to reach their compliance obligation [3]. The inclusion of offsets in the program provides an effective cost containment measure by creating a secondary pathway for companies to satisfy a portion (up to 4%) of their GHG compliance obligations through the purchase of offsets, which are most cost effective to produce and thus have a lower price than allowances. Using offsets reduces the likelihood of firms shifting additional Cap and Trade compliance costs onto ratepayers. If allowances were the only option for companies exceeding the cap, meeting the program’s greenhouse gas compliance requirements would become more costly. These increased costs could lead companies to raise prices for consumers to compensate for the financial burden. Cap and Trade also offers subsidies to support residents affected by increased utility bill costs, by allocating a portion of funds from the program as a “Climate Credit” that utility customers use towards their annual electricity and natural gas bills twice a year [4].
Capital Investment in Offset Co-benefits
Engaging private-sector capital in carbon markets through offset project investments also helps build industry efficiencies to optimize GHG reduction strategies and promote climate resilience beyond the scope of state-level policies. This ability to deliver simultaneous co-benefits is part of the reason for renaming the program Cap and Invest, due to its huge potential to produce benefits beyond GHG reductions. Offsets are a particularly cost-effective way to do this. For example, offsets can support Tribal sovereignty, economic development, and cultural heritage—as evidenced by the Yurok Tribe’s Land Back efforts and the Passamaquoddy Tribe that were financed by the use of carbon offsets. Offsets also directly build climate resilience by improving ecosystem health, wildlife habitat, water quality, and incentivizing wildfire fuel treatments.
With the various bills on the table, and Newsom’s proposal, The Climate Trust expresses full support for the programs extension, and the utilization of offsets to support its outcomes.
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