California Air Resources Board’s post-2020 cap-and-trade proposal: policy comments

Michael War and Danny Cullenward submitted a comment letter to the California Air Resources Board (ARB) to address substantive policy and market design considerations in ARB’s proposal for a cap-and-trade system for greenhouse gas emissions.

We make six recommendations for improving the rule:

1. Reduce the annual allowance budget to reflect the strong likelihood that in practice, feasible emission reductions from uncapped sectors will be less than from capped sectors in proportional terms—or provide a reasoned justification for the current assumption that both sectors can achieve equally proportional reductions.

2. Provide a reasoned basis for the post-2020 auction reserve price and the trigger price of the allowance price containment reserve (APCR). At present neither price is anchored to any scientific or economic rationale. We suggest tying these prices to the federal Social Cost of Carbon and/or to economic modeling that estimates high and low carbon prices necessary to achieve the 2030 statewide emissions limit, based on a reasonable consideration of economic and energy forecasting uncertainty.

3. Cancel unsold allowances at the end of 2020 rather than placing them into the allowance price containment reserve (APCR), in order to increase policy stringency. Allowing covered entities to bank surplus allowances from the pre-2020 phase into post-2020 compliance periods will discourage early investment in emission reduction technologies that will be key to accomplishing the 2030 and longer-term goals. Allowing banking of oversupplied pre-2020 allowances into the post-2020 period also reduces the environmental integrity of the policy.

4. Reconsider elimination of the 4% allowance allocation to the APCR. Alternatively, provide a reasoned justification for why circumstances now support preserving the 8% offset limit while eliminating the 4% APCR allowance allocation, which was established when the offset limit was increased from 4 to 8%.

5. Consider maintaining the existing disclosure regime for non-ARB jurisdictional markets. In the proposed regulation, parties would have 30 days to submit this information in the case of a “market disruption”—but that is too long to wait, should any sort of market crisis emerge.

6. Consider supplementing the Standardized Regulatory Impact Assessment with energy-economic modeling to more accurately assess the likely impacts of the proposed regulation.

Disclaimer: we are writing in our personal capacities only, not on behalf of our employers or any other organizations.