California Lawmakers Consider New Version of Cap-and-Trade System

4 May 2017

California state senators proposed a new cap-and-trade programme for the state this week, which would replace the current system. If passed, the legislation would take effect in 2020.

Pieces of the existing system, such as allowances and offsets, would not be eligible for transfer post-2020, ushering in new allowances and trading. The legislation aims to make the carbon price more stable over time, to eliminate an industry’s ability to amass allocations, and to provide a legally straightforward way of auctioning.

The proposed new programme comes as some other US states consider their own carbon pricing options, particularly given the political landscape at the national level. (See Bridges Weekly, 30 March 2017 and 13 April 2017)

Current carbon pricing scheme

The current emissions trading system went into effect in 2013, holding quarterly auctions with a rising price floor now set at US$13.57 per metric tonne. The revenue then gets allocated to green projects in the state. The scheme is also linked with Quebec and Ontario’s carbon emission trading programmes. (See Bridges Weekly, 16 April 2015)

The current system features the use of offsets, which is reportedly a point of contention for many stakeholders in California. Alongside offsetting, the legality of the current system has come under scrutiny, with a recent court ruling in favour of the system. (See Bridges Weekly, 13April 2017)

The case came from industry groups arguing that the cap-and-trade system acted as an illegal tax. The scheme has also faced continued debate on whether it has authority to operate beyond 2020, among other concerns.

Policy design

One of the main features of the new scheme is the creation of both a price floor and ceiling, referred to as a price collar, for the cost of a metric tonne of carbon dioxide.

The starting price in 2021 would be US$20 for the floor and US$30 for the ceiling, rising in 2022 to US$20 and US$40 respectively. Every five years, the floor would be raised by US$5 and the ceiling by US$10, adjusting for inflation. Setting limits on the price allows for costs to fluctuate with emissions so long as they stay within that range.

Embedded in the scheme is a climate dividend, which would return money to consumers every quarter, though the specifics of this mechanism are still under review.

Border adjustment tax

The proposed legislation removes the use of carbon offsets, which is a key feature in the existing scheme. Offsetting is a mechanism that allows companies to meet some of their emissions “compliance obligations” by investing in certain environmental projects, which can be cheaper than carbon allowances.

In California, these projects can include those relating to forests, livestock, ozone-depleting substances, and rice cultivation, among others. 

The new legislation includes a border adjustment tax, levying duties on imports based on their carbon intensity. The Economic Competiveness Assurance Program would be put into effect in tandem with the new legislation and would be tasked with ensuring that the tax does not have unduly negative effects on California industries vis-à-vis their competitors. 

Furthermore, the proposed legislation could potentially cut ties with Quebec and Ontario’s emission trading system, given its requirement to have a minimum carbon price that matches or exceeds that of the West Coast state.

ICTSD reporting; “California is about to revolutionize climate policy…again,” VOX, 3 May 2017; “California Proposes Ambitious New Cap-and-Trade Program,” MIT TECHNOLOGY REVIEW, 1 MAY 2017; “In the battle over California climate policies, green projects are now in the hot seat,” LA TIMES, 13 March, 2017.

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