Michael Shaw

Clearing the air on cap-and-trade

By Michael Shaw, VP, Government Relations

Capitol Update, July 24, 2017 Share this on FacebookTweet thisEmail this to a friend

Last week the California State Legislature debated and passed an extension of California's cap-and-trade program, a central tool in the state's effort to reduce greenhouse gas (GHG) emissions. Opponents of cap and trade claim that it will result in higher costs to businesses and consumers.  They are wrong.  In fact, the opposite is true.  Since California passed SB 32 last year to set a new target for emission reductions by 2030, we needed to extend cap-and-trade because it is the cheapest and most effective way to accomplish the 2030 goal.  

Critics ignore the reality that without cap-and-trade the projected increase in gas prices could be twice as high. The vote for cap and trade was a choice to pay far less, not more, for gas and electricity.  Without cap-and-trade, the Air Resources Board (ARB) would only have authority to reach our goals with a command-and-control regulatory regime.  The results would be disastrous.  Estimates from industry, ARB and independent analysts indicate that the cost to consumers without cap-and-trade would be three to five times higher than with the flexible program. If opponents of cap-and-trade had their way, many of the 1.2 millions manufacturing jobs and 3 million jobs elsewhere in the economy would be at risk. 

A short history of climate change policies in California

More than a decade ago, California set the goal to reduce GHG emissions down to 1990 levels under what is commonly known as AB 32. One of the programs created to help meet that target was the market-based mechanism known as cap-and-trade. Last year, a new goal was set under SB 32 requiring a reduction of 40 percent below 1990 GHG emission levels by 2030, but cap-and-trade was not reauthorized beyond 2020 leaving ARB with only the authority to impose a costlier command-and-control regime to meet the 2030 target.

The recent passage of AB 398 does not impose a new obligation to reduce emissions, rather it reforms the current cap-and-trade program to reduce compliance costs and extends ARB's authority to use cap-and-trade to help meet the 2030 goal. CMTA and more than 150 other business, agricultural and environmental groups came together in support of AB 398 because it is the most cost effective option to reach that goal while ensuring that California achieves real emission reductions.

How cap-and-trade controls costs

Rather than strictly require each facility to reduce emissions by a specified amount, something that would result in higher costs, the cap-and-trade program allows several options for a facility to account for their emissions. It is this flexibility that permits companies to seek the least-cost option, or set of options, to meet their compliance obligation, thus reducing costs to California manufacturers, saving high-paying jobs and achieving emissions reductions.

CMTA and other groups negotiated with legislative leadership and the administration to reform cap-and-trade in a way that would ensure it minimized the impact to business and consumers. Because California is the only state currently imposing a carbon cost on manufacturing and energy and fuel production, one of the most important cost containment elements is the industry assistance factors that provide allowances to facilities to help account for their emissions based on an efficient operation in each industry sector. Maintaining industry assistance through 2030 was the top CMTA priority and that reform made it into AB 398 <> and will continue to be part of the cap-and-trade program through 2030. 

Other AB 398 cost containment tools include a price cap on allowances ensuring that prices do not rise too high too fast leading to economically damaging increases in the price gas, electricity or goods. Additionally, the extension of cap-and-trade requires that ARB release more allowances for sale when the price hits certain levels in order to help control price increases. 

Legislators who voted for AB 398 deserve congratulations, not condemnation, for coming together on a bipartisan deal that cuts costs, reduces regulations and protects jobs while meeting environmental goals. Some Republican legislators came together with most of the Democrat legislators to pass a bill that supports manufacturing in California through better cap-and-trade cost containment and an extension of a sales tax exemption for manufacturing equipment.

CMTA supported AB 398 to reform and extend the cap-and-trade program and stands by the fact that this is the best way to protect the economy while reaching our climate goals. Please feel free to contact me at mshaw@cmta.net if you have any questions. 

Read more Climate Change articles

Capitol updates archive