What is California’s carbon pricing plan? – Energy Institute Blog


Policymakers see a diminished role for California’s cap and trade program.

November 14, 2012 was a big day in my book. It was the day we welcomed my son into the world (the cutest boy ever). It is also the day of the launch of the Californian carbon market with the inaugural auction of GHG allowances (a sold-out success).

Source: Alamy

The little boy is now an energetic nine-year-old boy. At each stage, we learn to give it room to grow. California’s cap and trade program has also gotten smarter over the years. But policymakers seem reluctant to give more space and responsibility to this maturing market.

This reluctance is expressed in the framework plan project released last week. Every five years, the California Air Resources Board (CARB) provides an update on the state’s progress toward its climate goals. Once approved, these plans shape the high-stakes process for updating California’s climate policies and programs.

The release of the draft plan last week kicks off a 45-day public comment period. If you care about California’s climate policy, now is the time to read, reflect, and question this plan. After a first reading, here is my concern. I can see why regulators might be inclined towards more prescriptive regulations. But as our climate ambition escalates, giving the carbon market a diminished role will cost us dearly.

Before I unpack this argument, I should point out that all bad parenting opinions and metaphors are my own. The views of this blog should not be attributed to my esteemed Colleagues from the Independent Emissions Market Advisory Committee (IEMAC).

California Climate Policy 3.0

The scoping plan begins with a projection of what California’s GHG emissions trajectory will look like under the many prescriptive regulations/mandates/orders already in place. The blue line in the graph below represents this “baseline” scenario. This emissions trajectory reflects all existing climate policies and programs *except* the carbon market.

Source: Draft framework plan 2022

California is committed to reducing GHG emissions to 40% below 1990 levels by 2030 (~260 MMT CO2e). This decree 2018 set a more ambitious goal of carbon neutrality by 2045. Focusing on the legally binding goal of 2030, you can see that the baseline scenario falls short.

The scoping plan goes on to identify additional measures (eg, accelerated building electrification, carbon capture and storage) that could be deployed to align California’s GHGs with our goals. The Green Line projects emissions under a proposed set of additional measures and investments.

Just because extra measures could be deployed to reduce our GHG emissions does not mean that they should be mandated. We could alternatively choose to rely on the carbon market to fill the gap between the baseline scenario and our GHG targets. But this is not the vision articulated in this framing plan:

“…the Cap-and-Trade program will likely play a reduced role depending on how uncertainties play out and whether new prescriptive policies or legislation are introduced.”

We have implemented a world-class, economy-wide cap and trade program in California. Why do we plan to demand less – rather than more – from this carbon market?

(A rhetorical question. There are reasons to ask for less. But today’s focus is on why we should ask for more…)

A reduced role for carbon pricing will cost us

Carbon pricing is not a silver bullet. For various reasons (network externalities, information failures, leakage issues, dynamic efficiency considerations, etc.), we need a portfolio of policy approaches to address the climate crisis. But after a decade of choosing prescriptive policies over carbon pricing, it’s clear that this choice can have significant financial implications.

The cost per tonne of CO2e emissions avoided is a rough metric that we can use to compare climate policies and programs. The chart below compares an assortment of cost per ton estimates (some marginal, some average) that have been recently observed or estimated.

Notes: I constructed this graph from the following sources: GHG allowance prices (2018-2020) are reported here. LCFS Awards (2018-2020) are reported here. The cost estimates for the RPS in 2018 come from this LAO report. Cost estimates for the ZEV credit program are estimated here. Cost estimates for heavy ZEVS are from this LAO report (other ZEV program costs estimated in this report are not included in the table).

The graph shows that the costs of programs and normative mandates have been higher than what we have paid for GHG allowances on the carbon market. The imposition of relatively costly measures put downward pressure on allowance prices, leaving out relatively inexpensive abatement options in the economy-wide carbon market.

It is important to note that these are not apples-to-apples political comparisons. There are other benefits (eg reductions in local air pollution) which may vary between reduction options, but which are not factored into the costs/tonnes. We should be willing to pay more for organic-fairtrade-vegan apples. But when choosing a relatively expensive apple, we should ask ourselves if the added benefits justify the higher price.

The carbon market safety net

Once approved, California will begin designing a policy strategy to support the vision of the framework plan. This is where the carbon market could have a critical role to play (if we let it). If/when the measures proposed in the framework plan turn out to be more costly or less effective than anticipated by the CARB, the decision makers will have to decide whether to stick to the plan or to propose an alternative.

Source

An alternative: ask the carbon market to seek more GHG reductions at lower cost. To prepare the carbon market for this supporting role, we need to tackle some concerns head-on.

One concern is the size of the quota bank. Market participants have accumulated more than 320 million allowances over the past nine years. A bank of this size could undermine efforts to achieve our goals if, when we ask the market for GHG reductions, market players respond by tapping into the bank.

How many allowances is too much in this market? My household has saved a significant portion of our income over the past decade. If we cease to exist in 2030, we oversave. But we’re putting money in the bank today in anticipation of a post-2030 future in which we spend more (two kids in college!) and earn less (we might retire one day). Coming back to the carbon market, I think it is difficult to assess the problem of oversupply when no formal commitment has been made to allocate permits – or extend the program – beyond 2030.

CARB has an obligation to “evaluate and resolve issues related to overuse” quotas available from 2021 to 2030. IEMAC has identified approaches that could be used to adjust the supply of allowances. We must address concerns about the supply of allowances as we step up our climate ambition. At the same time, it will be important to extend the time horizon of the carbon market to align it with the horizon of our policy objectives.

Demand more from the carbon market

California policymakers are urged to achieve ambitious climate goals in the face of boundless uncertainty. They are also responsible for charting a path to carbon neutrality that is fair, affordable, politically acceptable and exportable to other jurisdictions. Given the complexity of this exercise, it makes sense to plan ahead. But there is a risk of becoming too attached to the plan.

It will be important to design a policy strategy that is smart and flexible and able to respond to new information/new innovations. This is why carbon markets were born. If we give it a chance, California’s cap and trade program can do more to find and deploy relatively inexpensive GHG emission reductions. If we really want to contain costs, we should put this carbon market to work.

Follow Energy Institute blogs, research and events on Twitter @energyathaas.

Suggested citation: Fowlie, Meredith, “What’s the Plan for Carbon Pricing in California”, Energy Institute Blog, UC Berkeley, May 16, 2022, https://energyathaas.wordpress.com/2022/05/16/whats-the-plan-for-carbon -pricing -in California/

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