Statement on legislation to extend California cap-and-trade system

California’s Governor Jerry Brown, Assembly Speaker Anthony Rendon, and Senate President Pro Tempore Kevin de León have reached agreement on legislation to extend the state’s cap-and-trade program to 2030.  This statement forecasts what impact this achievement will have on the state’s carbon market, and can be attributed to Chris Busch, Director of Research at Energy Innovation. 

“Passage of these two bills, AB 398 and AB 617, will stabilize California’s carbon market by providing the legal and policy certainty market participants need.  We forecast future auctions for carbon allowances will sell out completely (or be ‘fully subscribed,’ in market terminology) in the coming years.”

“Our analysis finds adoption of this legislation should generate at least $1.3 billion in additional carbon allowance auction revenue between now and 2020 for the Greenhouse Gas Reduction Fund (GGRF).”

“Surpassing the two-thirds hurdle to extend California’s cap-and-trade program required compromise, such as maintaining existing levels of free allowances for oil refineries when they had been scheduled to decline.  While such concessions are difficult, context is key:  Additional free allowances for oil refineries will amount to less than two percent of the all allowances issued between 2021-2030. In fact, the oil lobby lost more policy battles than they won:  They did not achieve their goal of establishing a $50 per ton limit on allowance prices starting in 2021, nor did they secure the ability to use more offsets to cover emissions, but got the opposite (offsets would be reduced by the legislation).”

“Extra near-term revenue is expected because emitters will attempt to snap up allowances at relatively low current prices in light of the aggressive future emission reductions the program requires.   Increasing the number of allowances sold at auction before 2020 is possible because the surplus of allowances, first quantified by Energy Innovation’s research, would be purchased. AB 398 directs the Air Resources Board to tighten post-2020 caps if a buildup in surplus allowances jeopardizes the 2030 emissions limit.”

“While some environmental advocates may hesitate to cheer this deal because of the required compromises, perfection is too high a bar for support in the real world, and Californians should urge legislators to ratify this deal and celebrate when it is inked.”