What’s Next for California’s Cap-and-Trade Program?

14 Dec

California’s cap-and-trade program is up and running. The state’s Air Resources Board (CARB) held its first auction of greenhouse gas emission credits last month, racking up $289 million in revenue. Now, the state must decide on how best to divvy up the proceeds. Although much of the funding is legally restricted, the process for deciding who gets what promises to be contentious.

To start things off, let’s look at some of the highlights from the first carbon auction held last month. (For a full synopsis of the Golden State’s cap-and-trade program, we recommend reading this piece from the Mercury News.)

The November 14th auction was one of three that will occur on a quarterly basis this fiscal year (the next auctions are set for February and May). Up for bid are allowances (or permits) that authorize holders to emit up to one ton of carbon per allowance. Right now, the state is giving away the vast majority of available carbon permits, with the recent auction selling just 10 percent of the total allowances available. However, the proportion of permits auctioned will increase as more regulated entities begin to participate in the carbon-trading program.

The total number of allowances available (i.e., free permits and auctioned permits alike) will fall as the emissions cap is reduced at regular intervals. If everything goes according to plan, as permits become scarcer, the price per allowance will go up and carbon emitters will be encouraged to find more cost-effective methods of reducing their emissions.

The state sold all of their 2013 allowances (approximately 23.1 million) available for auction at $10.09 apiece, amounting to $233.34 million. In an advance auction, the state sold approximately 5.58 million allowances for 2015 at $10 each. The sale totaled approximately $55.8 million and represented about 14 percent of the 2015 allowances made available for auction.

The sale price of $10.09 for 2013 allowances was just nine cents over the minimum price set by state regulators. Some had expected each allowance to sell for between $11 and $12, or more. Earlier this year, the Legislative Analyst’s Office predicted [PDF] anywhere between $660 million and “upwards of $3 billion” in revenue may be generated from the auctions held this fiscal year. The Governor’s budget assumed $1 billion in revenues of which the state would use $500 million to backfill the general fund. While many considered the first auction a success, the outcome has policymakers recalculating their revenue forecasts.

First, it appears that the $500 million in revenue intended to fill state coffers isn’t going to materialize. If current trends hold, the upcoming February and May auctions may only raise $140 million for the state. That’s because the vast majority of the funds that are raised are not going directly to the state. In the November auction, all of the money raised from the sale of 2013 allowances goes to Investor-Owned Utilities and their ratepayers.

The $55.8 million from the sale of the 2015 credits will be deposited into the newly created State Greenhouse Gas Reduction Fund, per AB 1532. That fund is supposed to be used for investment in clean energy, low-carbon transportation, natural resource protection, and research and development of new technologies. Furthermore, SB 535 mandates that 25 percent of the Greenhouse Gas Reduction Fund benefit disadvantaged communities and a minimum of 10 percent of the funds are to be used to finance projects located within those underserved communities.

Now, policymakers need to work out the specifics of exactly how the revenues will be spent. For the Investor-Owned Utilities, the California Public Utilities Commission has issued a draft proposal that lays out how the utilities should spend the proceeds from the auctions. That plan is up for a vote on December 20th.

Next, the Governor will have to draft a plan on how to administer the Greenhouse Gas Reduction Fund. After the state calculates its share of the revenues from the auctions held this fiscal year, Governor Brown will develop a detailed expenditure plan for how the dollars will be spent. The state has proposed using funds from the auctions to finance projects and programs that reduce greenhouse gas emissions. The plan is to use Greenhouse Gas Reduction fund dollars to free up general fund revenues and make them available to fill budget gaps. Expect the Administration’s expenditure plan to be released in the early summer.

Moving forward, revenue from future auctions will be allocated through the budget process. The Department of Finance and the Air Resources Board are developing a 3-Year Investment Plan that will outline how the Fund will be administered. This plan will involve a series of workshops to facilitate the process, giving local governments, advocacy groups, and non-profits an opportunity to weigh in on spending priorities.

With the first auction, California has showed that there is a viable market for carbon and a potential revenue generator for the state. What remains to be seen is how these funds will be spent at the state level and how they will further the cause of greenhouse gas reduction.

One Response to “What’s Next for California’s Cap-and-Trade Program?”


  1. New Tool to Identify Environmental Justice Communities « The ELP Blog - January 17, 2013

    […] bears. CalEnviroScreen will be used as a tool to help the state to direct a portion of its cap-and-trade revenue to communities in need of economic and environmental health […]

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