A decade in, California’s cap-and-trade has slashed climate pollution and generated investments — where does it go from here?

Sunset on the Mohave Desert

This year, California marked the 10th anniversary of its landmark cap-and-trade program, and the Golden State has good reason to celebrate: California saw reduced year-on-year emissions from nearly every sector covered by the program. On top of delivering on critical emissions reductions, cap-and-trade has generated revenue resulting in $9.3 billion implemented through California Climate Investments programs that contribute to emission reductions, support climate equity and improve public health outcomes. And yet, there’s still much more work to be done to ensure that this program delivers reductions at the scale and speed required to avert the worst impacts of climate change while meaningfully supporting overburdened communities.

With a rulemaking in progress to make further necessary improvements to cap-and-trade, here’s what you need to know about what’s coming up through the end of the year and what to pay attention to in the new year.

Cap-and-trade is reducing emissions

The latest data from the California Air Resources Board (CARB) released earlier this month shows exciting progress on California’s emissions: emissions covered by the cap-and-trade program declined in nearly every sector in year-on-year emissions. Sources covered by cap and trade reduced their climate pollution by approximately 10,567,000 metric tons of CO2 equivalent, or 3.6%. Reductions were most prominent in the electricity imports sector, which declined by 12.4% or approximately 2,434,000 metric tons of CO2e. While this is promising news for the majority of sectors which delivered reductions, there’s still work to be done to see declines in all covered sectors; emissions from refinery and hydrogen production plants still rose slightly from 2021 to 2022 (increasing by 1.4%). Overall, emissions under the program are moving in the right direction and this is good news — but California must continue to increase the speed and scale of these reductions to meet our climate goals.

Raising ambition in the near term: progress on CARB’s rulemaking

In June of this year, the California Air Resources Board (CARB) kicked off a process to consider potential changes to the linked California-Quebec cap-and-trade program. Since then, CARB has held three public workshops focusing on those possible changes, especially the opportunity to tighten the emissions cap to achieve increased ambition through the cap-and-trade program.

Specifically, CARB is evaluating pathways through which California could achieve an updated 40%, 48% or 55% emissions reductions by 2030. By lowering the emissions cap, CARB has a huge opportunity to start implementing the increased near-term ambition that the 2022 Scoping Plan identified as necessary to meet California’s net-zero targets. To achieve that goal and protect California communities from the most devastating impacts of climate change, CARB needs to pursue at least a 48% reduction in emissions by 2030. And the timing couldn’t be better: with the influx of resources available thanks to the Inflation Reduction Act, California has an even bigger opportunity to increase its climate ambition. CARB is seizing the moment with this rulemaking to properly calibrate the emissions cap in line with the level of ambition required to act effectively as a backstop on climate-warming pollution.

Cap-and-trade is part of a large suite of climate policies in California, and it acts as an insurance policy to ensure that even if other programs don’t deliver the level of emissions reductions they aim for, the state will still have a ‘cap’ on emissions at a predetermined level. As the cap declines over time, covered sources must reduce their emissions in order to stay within the emissions budget, since there are fewer allowances available. Tightening the cap and issuing fewer allowances means CARB can speed up the pace of reductions, which is crucial; the longer we wait to cut emissions, the more pollution accumulates in the atmosphere. The path we take towards achieving emissions targets and the cumulative emissions reduced over time is even more important than hitting a particular target in a specific year.

In the next workshop — happening later this week on November 16th — we expect to get more information from CARB about how they plan on tightening the cap and improving the ambition of this landmark climate program. If you’re interested in climate change and this key opportunity to increase ambition, you can tune in to the workshop via Zoom.

Opportunities to address equity

Even as CARB is taking important steps forward to increase the climate ambition of this key program, we continue to encourage the Board to consider additional measures to support equitable environmental outcomes. One option could be facility-level emission caps on polluters operating in disadvantaged communities to ensure that pollution cuts are seen in communities overburdened by air pollution.

The Environmental Justice Advisory Committee has made a number of other recommendations as well, including requiring that offset credits be counted beneath the set emissions cap rather than in addition to allowances, or instituting an emissions containment reserve to modestly increase the ambition of the cap-and-trade program when prices are low. The Independent Emissions Market Advisory Committee has recommended that CARB study and consider these design changes, and EDF also encourages regulators to consider these updates as they review the program.

Extending climate leadership beyond California’s borders

Washington state, home to its own cap-and-invest system, announced this month that it plans to pursue linking its program with the joint California-Quebec market. This is a major milestone for state and sub-national climate leadership, and — if California and Quebec also decide to link — is a move that could drive deeper and faster cuts in climate pollution while creating a more stable, predictable market for all. California and Quebec both went through the linkage process to join their markets together in 2014, and they each have their own processes to make a decision about linking with Washington.

With this step forward in Washington, the ball is now in California and Quebec’s court to initiate those processes and facilitate more climate collaboration across borders. We’ll be watching closely for developments in the linkage process, so stay tuned for more updates.

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