The California State Legislature voted by a greater than two-thirds margin to extend the state’s cap-and-trade program last night. Bipartisan support led to the supermajority, which makes the program immune to legal challenges. This is undoubtedly the most important climate news since President Trump decided to withdraw from the Paris Agreement, and it is perhaps even more consequential.
It is especially important to note the support from both sides of aisle. Governor Jerry Brown, Senate Leader Kevin de León, and Speaker of the Assembly Anthony Rendon are key Democratic leaders with a national profile, and California Air Resources Board (CARB) Administrator Mary Nichols has served under Republican and Democratic governors. But, add to that Republican Assembly Leader Chad Mayes, who said that California Republicans believe in climate change and believe in markets. Indeed, in every one of the ten states with cap-and-trade, the effort has been supported by both a Democrat and Republican governor (except Delaware, which has remained Democratic).
The legislation follows last year’s legally binding commitment to reduce the state’s greenhouse gas emissions by 40 percent from 2020 through 2030, the most ambitious goal in the world. But that legislation left the policy mechanism unspecified, with a default role for prescriptive standards to be implemented by CARB. Importantly, that bill in 2016 also explicitly bound the future of cap-and-trade to environmental justice efforts, which were described in companion legislation.
This week put in place the mechanism to achieve the climate goal, extending the current cap-and-trade program. Some observers complain that cap-and-trade provides only 20 percent of the emissions reductions in California, with the remainder identified by the state agency through specified measures and standards. But that role for cap-and-trade provides a model upon which to build, while ensuring the cap is achieved and that no low-cost emissions reduction is left behind. Going forward, the victory from an economic perspective is the growing role for incentives. Based on the state’s draft scoping plan, the role of cap-and-trade will increase to 40 percent of the emissions reductions, while continuing to provide a backstop for the overall emissions goal. This is the historic victory for economic ideas.
The cap-and-trade program will continue to include the important role for a price floor and cost containment measures—at two price steps additional allowances are available from a reserve under the cumulative emissions cap. Added to that is a third price step that provides a hard price ceiling, meaning the price cannot go higher than that level. The cap is protected with additional allowances at that price from under the cap, and a mandate for the state to acquire further out-of-market emissions reductions if necessary. The price levels are left to be determined by the expert agency, but legislative intent seemed to signal a ceiling of $60 that would increase along with the price floor at 5 percent per year plus inflation. There is rising likelihood of increasing prices with the stringent cap, so these measures are important.
There remains an important role for offsets, but that role is reduced to 4 percent of a firm’s compliance obligation, increasing to 6 percent over the decade. Other familiar provisions such as banking remain in place. Importantly, the current link with Quebec and pathway to linking with Ontario and possible other US states remains solid. And most importantly, from the California perspective, the environmental justice concerns are addressed directly in companion legislation.
There are compromises in this bill, some perhaps more virtuous than others, that provide tax relief for industry and provide greater legislative oversight of spending of auction revenues. But overall the legislation offers a great vision not only for climate policy goals but how they can be achieved. Three key elements in the special California approach include: (1) explicitly addressing the concerns of chronically disadvantaged communities through environmental justice, (2) using smart market design with bipartisan support, and (3) leaving specific details out of the legislation and in the hands of an expert agency, to be decided with public comment and legislative oversight. That model of climate governance is the biggest offering California has made to the world. With a two-thirds vote in place and the policy secure, I expect to see these California leaders show an increasing presence on the national and international stage.