Key Issues for California's Cap-and-Trade System Analyzed by Analysis Group Consultants
August 13, 2018
California's greenhouse gas (GHG) cap-and-trade program took effect in 2012, and it has been a central feature in the state's efforts to achieve its climate policy goals. It requires industries to obtain allowances to emit GHGs into the atmosphere; these allowances may also be traded among industries. Amendments to the California Global Warming Solutions Act of 2006 (also known as AB 398) extended the program through the decade 2021–2030 while also mandating that the California Air Resources Board (CARB) make changes to “cost containment” mechanisms and consider the need to adjust allocation of GHG allowances after assessing concerns about “overallocation” of allowances from the years 2013–2020.
In a white paper, Analysis Group Vice President Todd Schatzki and affiliate Robert Stavins address a series of issues related to the design of and possible changes to the cap-and-trade program during the period covered by AB 398. The topics they analyze include price levels for the program's price ceiling and price containment mechanisms, and what changes, if any, should be made to the program's allocation of GHG allowances in light of overallocation concerns. Among their findings are that the social cost of carbon is the key economic consideration for price-setting purposes, and that the debate concerning overallocation would be best served, from the standpoint of both climate goals and cost, by continuing to focus on cumulative emissions goals, rather than annual targets.