The Future Of Cap-And-Trade

On January 7, 2016, Governor Jerry Brown presented a cap-and-trade expenditure plan for Fiscal Year 2016-17, totaling $3.1 billion. Because the carbon market appears to be underperforming, some legislators question whether the program should extend beyond its sunset in 2020.

The cap-and-trade program in California is contentious in many ways. While many can agree on the end goal of reducing carbon emissions, there is a financial problem when the carbon market is generating inadequate revenue. The most recent auction in May was expected to yield $150 million in revenue, but generated $2.5 million after only 11% of the available credits were purchased.    

As a result, big plans to spend cap-and-trade revenue were scrapped. The California High-Speed Rail Authority, which receives 25% of carbon sales proceeds, is the largest beneficiary of cap-and-trade dollars and relies on auction proceeds to fund rail construction. Without these funds, high-speed rail’s future looks bleak.

Local governments are affected as well, because a percentage of carbon proceeds helps fund grants for affordable housing (20%) and intercity rail projects (10%). Cities looking to build affordable housing or break ground must pay for the projects themselves or seek other funding sources.

Supporters of cap-and-trade and high-speed rail say the blip in May does not mean dismal failure. They believe that the lack of demand for carbon credits is proof that the program is actually successful. The cap-and-trade law, signed in 2006, proposed to reduce greenhouse gas emissions to 1990 levels by 2020. Less carbon credits on the market means less carbon is emitted, and carbon emissions in California have been falling at a high rate.

Opponents of the program claim that the program will fail as a surplus of carbon credits reduces their value. Because market forces determine the price of each carbon credit, numerous market failures can bring prices to an artificially low point. Other critics call the program unconstitutional, because it functions as a tax, which requires a two-thirds vote by the Legislature to be approved.

The program does not sunset until 2020, but today’s successes and challenges of the program will dictate whether the law will extend past 2020.

Written by Jeff Khau, a Senior Analyst at RSG