California’s cap and trade is succeeding after two years, report says

By Katie Hsia-Kiung, High Meadows Research Fellow, US Climate and Energy Program, Environmental Defense Fund

Note from Catherine Leining at Motu:  This week we host a guest blog on the California Emissions Trading Scheme (ETS) by Katie Hsia-Kiung at the Environmental Defense Fund.  On 3 February 2015, Katie and her colleagues Erica Morehouse and Derek Walker gave a fascinating presentation on the California ETS to participants in Motu's Low-Emission Future Dialogue. With coverage of the electricity, industrial, transport and natural gas sectors as of 2015, the system covers 85% of the state's emissions, and additional sectors can engage through an offsets mechanism. They highlighted some of the key design differences relative to the NZ ETS, including: partial auctioning of allowances with a price floor (currently US$11.34) and an allowance price containment reserve; a quantity limit on the use of offsets (8%); and direct linking with Quebec's ETS.  Their auction produced revenue of about US$1 billion in 2012, and this is projected to increase to US$12 billion by 2020. Revenue is being directed to reduce the system's impact on electricity ratepayers and benefit the most impacted communities through programmes on sustainable communities and clean transportation, energy efficiency and clean energy, and natural resources and waste diversion.  Significantly, California's ETS was envisaged as an "insurance mechanism" accounting for about 20% of the emission reductions within a suite of 70 complementary mitigation policies operating across the state. This experience could help to inform the government's review of the NZ ETS scheduled in 2015.  

These days, everyone seems to have an opinion about everything. The ubiquity of social media channels has saturated public discourse with so many viewpoints that it can be nearly impossible to distinguish facts from fiction. But facts still matter. Even though an argument about the quality of a neighborhood restaurant or the accomplishments of your local elected official might be inherently subjective, there’s no question that strong, empirical evidence gives you the best shot at coming out on top. What’s more, the greater the consequences of the issue being debated, the higher the stakes are when it comes to analyzing and acting on real-world evidence.

On one particularly timely and potentially far-reaching issue—solutions to climate change—evidence is mounting and becoming impossible to ignore: cap and trade is not just an idea you learn in an economics lecture, it is a policy solution being deployed successfully in California, the world’s eighth largest economy. According to EDF’s comprehensive analysis released today, California’s cap-and-trade program is working after two full years of implementation. Not only is the program incentivizing energy efficiency improvements, it is paving the way for the state to pass even stronger climate policies, and is helping other states and nations move forward with similar steps. Here are some of the top conclusions EDF puts forward in the report, based on our analysis of the evidence:

1. California’s cap is driving down greenhouse gas pollution while allowing the economy to grow. Our report shows that since the beginning of the program, jobs in California have grown at a faster rate than in the rest of the U.S. The state has been able to grow its economy significantly while keeping greenhouse gas pollution from growing along with it, and emissions capped under the program actually decreased by almost 4% during the first year of the program. What’s more, California’s ambitious climate change and clean energy policies have created a thriving clean economy that is growing faster than the overall economy and attracting considerable amounts of investment. California has received more clean tech venture capital investment than all other states combined and leads the rest of the nation in clean tech patent registration.
2. As a result of the program, California has built a robust carbon market that is getting progressively stronger. Companies can purchase allowances through quarterly auctions or on the secondary market. The results of nine successful auctions to date reflect a healthy level of interest for carbon allowances and confidence among companies in the long-term health of the program. The secondary market has also matured significantly over the course of 2014, as measured by increased trading activity coupled with stable allowance prices. In addition, California successfully linked its program with Quebec’s over the past year, proving that motivated governments can work effectively together and do more in partnership than they can alone. This outcome may pave the way for similar linkages around the world.
3. Companies are taking cap and trade seriously and complying with the regulation. 100% of regulated companies acquired enough allowances to meet their first compliance deadline, a strong demonstration that they are beginning to incorporate the price on carbon into their business models and actively plan how they will comply with the regulation.
4. The state government and regulatory agencies have demonstrated their full commitment to maintaining the integrity of the program. During the 2013-2014 legislative session, several bills designed to strengthen the cap-and-trade program were passed, while measures that would have harmed or derailed the program all failed to move forward. There were also several calls to establish longer term caps beyond 2020, to set California on the path to 80% below 1990 levels of emission by 2050. The regulatory body overseeing the program, the California Air Resources Board, has also been diligent in seeking improvements to the regulation where possible through a rigorous amendment process.

On the strength of this concrete success, California is moving into the second phase of its program with a promising outlook for the future. Through the forthcoming investment of auction proceeds, the Golden State’s cap-and-trade program will not only cut pollution directly, but will fund innovative projects that will further reduce greenhouse gas pollution and benefit communities throughout the state. In 2014, California’s legislature laid out the plan for how $902 million of the revenue will be used to create cleaner transportation options, improve energy efficiency of houses and buildings, and preserve the state’s natural resources. In addition, more than 30% of this will be directed to projects that benefit low-income communities that are disproportionately affected by climate change. Through these projects, the program will spur significant growth in the state’s clean economy and create jobs while cleaning the air and improving the health of our communities.

California’s successes are coming at a critical time, as global momentum for climate action grows. At the 2014 UN Climate Summit in New York City, governments representing 54% of global greenhouse gas emissions and nearly half of the global population announced their support for carbon pricing. As the need for climate action becomes more and more dire, states and countries are looking to California as a partner to learn from.

It’s been said that, “A wise man proportions his belief to the evidence.” And the evidence in support of cap and trade, gleaned from careful analysis of the first two years of the world’s most ambitious program, is undeniable. After what is likely to be deemed the warmest year on record globally, the need to curb greenhouse gas pollution and arrest climate change can no longer be ignored and California is showing that it can be done through well-designed climate policies that allow the economy to thrive.