Price Controls without Cost Controls | Scorcher
Sheldon Zakreski, The Climate Trust
Weekly Policy and Finance Update – July 17, 2017
California’s plan for a post 2020 cap and trade market is taking shape. Assembly Bill 398 has broad support among industry and environmental groups. The bill mostly continues the cap and trade program that came into effect in 2013, but notably establishes price ceilings for allowances. Price ceilings became a big deal politically after the state passed a new transportation package that increased gasoline taxes; the concern was that extending the program through 2030 would place immediate upward pressure on allowances, which would lead to further energy price increases.
The bill creates two price speed bumps whereby if allowances reach a certain price point the state will sell additional allowances held in a reserve at the speed bump price. Despite this concern about price escalation, the bill also does something to improve the odds that the market will hit the price ceilings. Currently, compliance entities have an offset usage limit of 8%, but under AB398, this limit will go down to 4% with a requirement that no more than 2% come from California projects and no more than 2% from out of state projects. The limits go up to 6% total capped at 3% in-state/out of state in 2025.
A recent analysis done by CaliforniaCarbon.info for the American Carbon Registry found that this change could add an additional $18 billion in compliance costs for the cap and trade program. While the extension demonstrates California’s continued leadership on climate, it’s curious that while increased costs were such a great concern, AB 398 greatly reduces the ability of offsets to play their role as a source of cost savings for California businesses and taxpayers.
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Image credit: Flickr/Bemep