4 ways California should strengthen its cap-and-trade program

This blog was co-authored by Mary Catherine Hanafee LaPlante, Intern, U.S. Climate Policy

As the hottest summer on record scorches the state, California leaders are working to tackle the impacts of climate change head-on by strengthening an essential tool in their climate policy toolbox: the state’s cap-and-trade program.

Last year, the California Air Resources Board (CARB) finalized its Scoping Plan for Achieving Carbon Neutrality which recognized the importance of accelerating action this decade to put the state on track to achieve net-zero emissions by 2045 as well as 85% reductions below the 1990 level. Specifically, the Scoping Plan highlights that California needs to exceed its near-term goal and achieve 48% reductions below 1990 by 2030.

To reach these critical goals, CARB is evaluating potential amendments to its cap-and-trade program. With two workshops on the books, CARB is already making significant strides towards fortifying the program.

Here are four key opportunities for the state to strengthen the cap-and-trade program:

1.  Align the emissions cap with the Scoping Plan goals

The cap-and-trade program plays a crucial role within California’s suite of climate policies by ensuring that emission sources covered by the program do not exceed the allotted emissions “budget.” The program does this by setting an overall, declining cap (or limit) on emissions and accounting for each ton of climate pollution beneath the cap with one emission “allowance.” Emissions sources covered by the program — which account for approximately 78% of the state’s total emissions — are required to hold one allowance for every ton of climate pollution they emit. As the cap declines over time, sources must cut their pollution because there are fewer allowances — in other words, fewer emissions — available under the cap.

That’s why tightening the emissions cap is a critical tool to accelerate emissions reductions: when the program issues fewer allowances, regulated sources must release fewer emissions — and the program achieves greater emission reductions.

The current emissions cap is set to decline towards a 40% reduction below 1990 levels by 2030. But California can — and should — tighten the emissions cap to achieve the Scoping Plan goals. CARB has taken a promising step forward toward this goal, announcing at recent workshops that the state is evaluating multiple allowance budget scenarios set to a 40%, 48%, and 55% reduction below the 1990 level by 2030. The scenarios also evaluate allowance budgets to meet the state’s longer-term legislative goals to reach net-zero emissions and reduce emissions at least 85% by 2045.

EDF applauds this important step and urges CARB to move forward with a cap adjustment that will reduce emissions at least 48% below 1990 levels by 2030 — in line with the emission reductions called for in the state’s 2022 Scoping Plan.

2.  Calibrate the cap as the emissions “backstop”

Increasing ambition in the cap-and trade program is especially important to provide a “backstop” on emissions: playing a crucial role in keeping California on track to achieve cumulative emission reductions in line with its goals. Essentially, the emissions cap is the state’s “insurance policy” — in the event that other policies deliver fewer reductions than expected, the emissions cap ensures that the necessary reductions are still accomplished.

This is especially important as CARB has raised concerns about the ability of California to deploy nascent technologies like green hydrogen and carbon capture on a meaningful scale by 2030. So, in the event that these technologies don’t deliver the desired reductions on the necessary timeline, California can rely on its emissions backstop to ensure the state still meets its climate goals. Uncertainty underscores the necessity of a firm emissions cap.

To function effectively as the backstop, the emissions budget must be calibrated to ensure that cumulative emissions in California stay below levels allowed under a linear trajectory from 2020 to the Scoping Plan’s 2030 target.

As described in more detail below, CARB’s approach to setting future allowance budgets already takes a crucial step in this direction by committing to achieve cumulative reductions consistent with the target trajectory. CARB should also evaluate strategies to shore up the emissions cap as the backstop on economy-wide emissions. That could include factoring in emissions projections for California emissions sources that fall outside of the cap’s coverage. This helps to ensure that the allowance budget is stringent enough to account for potential emission growth in uncapped sectors and still achieve the necessary cumulative reductions. This “backstop” approach should also factor in any previously “banked” allowances that may be used for compliance in the upcoming years to ensure that, when these allowances are used, the program still guarantees the necessary pollution cuts.

3.  Minimize cumulative climate pollution this decade

California’s commitment to tightening its allowance budget marks a significant stride in climate ambition: not only will a more ambitious cap help the state meet its 2030 and 2045 climate targets, but it will also accelerate emission cuts in the near term.

To effectively minimize climate damages, California must rapidly cut climate pollution in this decade. Long-lived greenhouse gases, like carbon dioxide, can last for centuries in the atmosphere — meaning that pollution emitted today will continue fueling climate impacts for generations to come. Therefore, the sooner California cuts emissions, the greater the cumulative reductions — and the easier it becomes to ensure California minimizes the cumulative build-up of climate pollution over time.

CARB’s recent workshop emphasized the importance of securing cumulative emission reductions consistent with the state’s goals. Staff presented modeling scenarios that considered three “end points” for the point-in-time target the emissions cap would be set to achieve in 2030 — then, critically, showed how the emissions budget between 2025 and 2030 would be tightened to reduce cumulative emissions in line with meeting these targets.

For example, the figures below illustrate the “hypothetical linear decline” that would have been achieved by tightening the emissions cap between 2021 and 2030 aligned with the state’s Scoping Plan scenario: a 48% reduction below 1990 levels by 2030. To implement the cumulative reductions consistent with the Scoping Plan scenario, CARB would need to apply these reductions — which are modeled over the decade — to the future 2025 through 2030 allowance budget.

The “hypothetical linear decline” shows the trajectory if the emissions cap were reduced, beginning in 2021, towards the Scoping Plan’s 48% by 2030 emission reduction goal. This emissions trajectory, modeled over the course of the decade, is then used to determine the cumulative reductions that are needed from future allowance budgets. Note that this analysis is an approximation based on the methods described in CARB’s July 27, 2023 workshop.

Future allowance budgets in 2025 through 2030 would be adjusted to achieve the same cumulative reductions under the “hypothetical linear decline.” Note that this analysis is an approximation based on the methods described in CARB’s July 27, 2023 workshop.

This approach emphasizes that the path we take towards achieving emissions targets — and the cumulative reductions achieved over time — is even more important than “hitting” a particular emissions level in a specific year.

EDF commends CARB’s focus on driving cumulative reductions in line with the state’s target — helping the state accelerate emissions reductions as rapidly as possible and secure a safer climate future.

4.  Follow recommendations from the Environmental Justice Advisory Committee

As CARB evaluates potential changes to the cap-and-trade program, it should strongly consider implementing the following recommendations from the Environmental Justice Advisory Committee and the Independent Emissions Market Advisory Committee:

  • Introduce facility-level caps on polluters in disadvantaged communities to ensure pollution cuts keep pace in communities overburdened by air pollution,
  • Create an emissions containment reserve so that the allowance supply is responsive to demand, and
  • Require that offset credits are counted beneath the emissions limit rather than in addition to allowances.

These recommendations should be part of CARB’s modeling of the allowance budgets to ensure that all program updates are considered holistically.

Going even further: How a stronger California-Quebec market can link with others

Raising ambition in the cap-and-trade program would not only be a huge step forward toward cutting California’s climate pollution — it would also put the state in an even better position to extend its climate leadership outside its borders by linking the California-Quebec carbon market with the cap-and-invest program in place in Washington state and the program under development in New York.

Linking the programs between California and other jurisdictions can lead to more significant reductions in climate pollution, support lower cost — and faster — progress on pollution reductions, and increase stability in the carbon market. Fortunately, the California-Quebec and Washington programs are already aligned in key ways, enabling them to benefit right away from a linked market. Strengthening California’s cap-and-trade program would put the state in an even better position for linkage — elevating the bar for climate action across jurisdictions and helping a broader, linked carbon market drive deeper and quicker emission reductions.

The cap-and-trade rulemaking is a golden opportunity for California to make strides in its fight against climate change and raise the bar for all states that have committed to climate action. We urge the state to maximize this critical opportunity.

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