Almost four years ago, California started an initiative known as cap-and-trade where companies can purchase carbon emission allowances through an auction system. A portion of the proceeds from the auction are then used to support green energy programs.
This was the first initiative of its kind in the United States and it has been wrought with challenges. The origins of the program date back to Assembly Bill 32 that was signed into California state law in 2006. The legislation required that California reduce its carbon emissions so that it meets 1990 levels by 2020 with “a system of market-based declining annual aggregate emission limits.”
The cap-and-trade program was approved by the state in 2012 and officially launched in 2013. The goal of the program is to meet meet the 2006 mandate for emissions reductions by auctioning off carbon allowances to companies who have emissions beyond the amount they are permitted.
Twenty years after the original legislation, in late August 2016, state legislators extended the emissions goal another decade. The new goal seeks to reduce emissions 40 percent below 1990 levels by 2030. The cap-and-trade program was not extended as part of that change.
A lawsuit has been filed in opposition of the cap-and-trade program. It is being spearheaded by the California Chamber of Commerce and businesses who argue that this program is a multibillion-dollar tax that requires a two-thirds legislative vote (which the legislature did not get when the law passed in 2012). The lawsuit is currently hung up in state appeals court.
To date, the cap-and-trade program has collected about $1.6 billion from emissions proceeds. State law SB535 mandates that at least 10 percent of the money collected from this system is required to go toward projects in disadvantaged communities. One such project provides free solar panels in low-income communities (link to other article). So far, about $14.7 million has been allocated from the proceeds to help improve the local environment.
The program is structured to decrease the number of available emissions each auction cycle, while increasing the cost. Since the ultimate goal is to reduce carbon emissions, the program’s supporters created this system to de-incentivize buying the emissions. Instead, they would like companies to make long-term investments in energy efficient systems.
Earlier this year the program experienced a serious decline in demand since the first time it was launched in 2013. While officials had anticipated about $500 million in revenues from the May 2016 auction, only 11 percent of the permits were sold, bringing in a scant $10 million.
Some industry experts said that the decline in revenues from this program means that the cap-and-trade program is doing what it set out to do – decrease emissions and decrease demand for the permits. However, the state of California is short the projected revenue from this program and is having to make appropriate adjustments.
A quarter of the proceeds of this program are slated to benefit Gov. Jerry Brown’s legacy project – the high speed bullet train. The $68 billion train is designed to travel at 220 mph and take passengers from San Francisco to Los Angeles in two and a half hours. But the future of the train and its connection and dependence on the cap-and-trade program leave it in a vulnerable position.
Similar cap-and-trade programs have been established in other areas. The largest in the world has operated in the European Union since 2005 and is known as the European Union Emissions Trading Scheme. They have also dealt with challenges similar to ones that California is experiencing.
Overall, there seem to be positive benefits to the cap-and-trade model. However, legal challenges and instability in forecasting can be difficult for governing bodies to manage. The end goal of reducing a state or country’s overall emissions is extremely positive. Taking the proceeds of these initiatives and putting them back into green energy programs is also very positive. This is clearly a model that is being tested, reworked and retried on a continuous basis. We will continue to monitor the cap-and-trade initiative.