California Extends Cap and Trade to Tackle Climate Change
By Sarah Jo Szambelan, Research Manager
August 1, 2017

Just months after the U.S. decision to withdrawal from the Paris Climate Accord, California made its latest move in climate leadership when Governor Brown signed AB 398, a law that extends California's landmark cap-and-trade program for 13 more years and gives it stronger legal standing. This step clarifies cap and trade as one of the state’s key strategies in meeting its most ambitious climate goal yet — reducing emissions 40 percent below 1990 levels by 2030.

The future of cap and trade in California was anything but certain last year when the state codified its 2030 climate goal. At the time, legal challenges alleged that revenue collection under the cap-and-trade program, originally created with just a simple majority, amounted to an unlawful “tax.” Many wondered if the program would survive past 2020, and cap-and-trade permits went largely unsold at some auctions. In addition the state also passed AB 197 last year, directing the state climate regulator, the California Air Resources Board, to consider meeting the 2030 target without cap and trade, which the agency’s draft plan did.

But with Governor Brown’s urging, and amid multiple legislative proposals to keep cap and trade alive, the newest law passed with a bipartisan super-majority, giving it a new legal strength that signals to innovators, investors and auction participants that California is the place to advance carbon-free technologies, carbon-free businesses and a carbon-free way of life.

How Cap and Trade Helps California Grow

Cap and trade works by first setting a cap on all emissions equal to our statewide goals. Permits, each representing a ton of greenhouse gas emissions, are then auctioned to emitters. Emitters have the incentive to reduce emissions at a cost lower than the permit price and then sell unused permits to other polluters with higher abatement costs. This process puts a price on carbon and gives businesses the flexibility to decide how to reduce emissions beyond what is already directly regulated. Flexibility means cost savings for businesses and consumers, and allows businesses to remain in California.

Some of the state’s biggest businesses at risk of leaving due to climate polices are cement manufacturers, who play a key role in supplying materials needed for new development and for building and maintaining transportation infrastructure. Keeping these businesses in the state will likely prevent the costs of construction projects from increasing and keep our ability to meeting our housing and transportation needs within reach.

Generating Revenues From Cap and Trade Is Critical

The new law secures a stream of revenue (of roughly $3.4 billion to date) that can continue to support key investments in affordable housing, sustainable transit, building energy efficiency and more. By law, 35 percent of these revenues must be spent in disadvantaged communities, but some report that we’ve done even better, spending more like 50 percent where it’s needed most.

The ability to reinvest cap-and-trade auction revenues is one of the reasons CARB’s draft scenarios that included cap and trade came out with higher net benefits to the state (see page 62). Direct investment of revenues, net job gain and other benefits amount to a $1.5 billion boost the San Joaquin Valley alone, a region that suffers disproportionately from poor air quality and lack of economic opportunity.

Addressing Environmental Justice Concerns

Environmental justice groups have long contended that cap and trade does not give local communities burdened by poor air quality enough control over emissions. Many of them see the extension of cap and trade as a compromise. In fact, AB 398 preempts CARB and local air districts from enacting local limits to greenhouse gas emissions from sources already under the cap-and-trade program. Yet importantly, the new law still allows for local control over the types of air pollution that degrade local air and cause asthma and heart disease.

As a state, we should ensure that AB 617 — a bill passed in tandem with the new cap-and-trade law that promises to further limit health-damaging local air pollution — does its job in our most vulnerable communities. We should also continue to make sure cap-and-trade revenues are spent within such communities and are designed to directly benefit them, as AB 398’s prioritized list of investments for cap-and-trade revenues aims to do.

The extension of cap and trade and air pollution controls shows California’s expert understanding of the dynamic economic tradeoffs of climate policy and again places the state center stage in the global fight against climate change.

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