Peter Weisberg, The Climate Trust
Weekly Policy and Finance Update – May 8, 2017
The cap-and-trade systems implemented in the U.S., to date, have been “over-allocated.” Emissions fall below a high cap based upon conservative assumptions for economic growth and technology development. Low carbon prices result.
California is about to change that. Last year the state passed ambitious reduction requirements into law—40% below 1990 levels. These steep targets are a true test for carbon pricing.
The existing cap-and-trade system in California, crafted in 2006, can meet these requirements. A careful system for allocating allowances prevents leakage (where trade-exposed industries leave the state due to carbon pricing). The limited use of carbon offsets delivers a price signal to value climate mitigation in forestry and other land use sectors—sinks for emissions we know are key to meeting long-term climate goals. This, and existing linkage with Canadian provinces, acknowledges that California cannot mitigate global emissions alone.
After a state appeals court once again upheld the legality of this existing system (because “no entity has a vested right to pollute” the ruling reads), a new challenge has emerged: Senate Bill 775 to overhaul cap-and-trade to be more like a tax. Though the bill will certainly change, the current draft loses many of the features that uniquely position the existing cap-and-trade system to handle the forthcoming steep reduction requirements. Eliminating offsets will raise costs while removing the price signal to forestry and land use sectors. Removing allowance allocation will rely upon a new and untested set of tariffs to attempt to reduce leakage—sure to continue the legal uncertainty that has hampered the market to date. Setting a new standard for linkage will make it more difficult for existing Canadian partners to participate (not to mention hampering other progressive U.S. states considering joining). Finally, allowing unlimited allowances to be issued at the price ceiling means there is no certainty that the steep reduction requirements will actually be achieved.
California has painstakingly developed, tested and proven an excellent carbon pricing mechanism to send the right signals for long-term investment in low carbon infrastructure. Now it needs to stick with that system, demonstrate that it works even when the reduction requirements are significant, and maintain existing partnerships while building new ones. Now is precisely the wrong time for California’s climate policy to turn inwards.
California’s cap-and-trade program doesn’t need an overhaul
Environmental Defense Fund, May 2017
Carbon pricing under binding political constraints
Jessie Jenkins and Valerie Karplus, April, 2016
California Senate proposes cap-and-trade overhaul
Sacramento Bee, May 1, 2017
Governors Urge President Trump to Stay in Paris Climate Agreement
EHS Today, May 3, 2017
The Financial Performance of Real Assets Impact Investments
Global Impact Investing Network, May 3, 2017
Trump Waffles on the Paris Climate Accord
Mik McKee, The Climate Trust, April 26, 2017
Image credit: Flickr/Bemep