The role of cap-and-trade in meeting California’s 2030 climate target

We comment on the relationship between the 2030 Scoping Plan and the AB 398 implementation process. AB 398 requires a number of substantive changes to the post-2020 cap-and-trade market design the California Air Resources Board (ARB) adopted in August 2017; however, the timing of these changes presents analytical challenges.

In the 2030 Scoping Plan that must be finished by the end of 2017, we anticipate that ARB will identify emission reductions in 2030 from various measures, including the cap-and-trade program. However, it is impossible to say what the actual annual emission reductions from the cap-and-trade program will be until market design changes are finalized in 2019, because the choices ARB will make in implementing AB 398 will control how the cumulative reductions delivered by the program are distributed on an annual basis.

To resolve this issue, we recommend that ARB directly and quantitatively evaluate how its cap-and-trade regulations under AB 398 will reduce emissions in 2030, above and beyond reductions from non-market-based measures identified in the final 2030 Scoping Plan.

Further analysis showing how the 2030 annual target will be achieved is especially important given the large role ARB expects cap-and-trade to play. Like any cap-and-trade program, California’s program allows regulated emitters to shift the timing of their emissions through various measures such as banking of allowances, access to some 80 million extra allowances at price containment points in the post-2020 market period, the use of over-allocated allowances from the pre-2020 period in the post-2020 period, and unlimited allowances made available at a hard price ceiling. As a result, the specific market design ARB adopts pursuant to AB 398 will have important effects on the timing of emission reductions from sources regulated under the cap-and-trade program. In turn, the timing of emission reductions will determine whether or not the cap-and-trade program is capable of closing the gap between ARB’s selected complementary policies and the SB 32 annual target in 2030.

As we and our colleagues have previously emphasized, ARB needs to show how its 2030 Scoping Plan delivers on the SB 32 annual target for the year 2030, not an estimated reduction in cumulative emissions relative to a modeled baseline. While cumulative emission reduction estimates can provide a helpful, high-level metric for comparing the role of individual policies, no cumulative analysis can replace a direct analysis of annual emissions showing that ARB’s selected policy measures will deliver on ARB’s legal requirement to achieve the SB 32 annual target in the year 2030. ARB’s inclusion of annual emission reduction requirements for the cap-and-trade program in the draft Scoping Plan is helpful but not sufficient, because the program is at core a cumulative emissions reduction instrument; translating the cumulative reduction requirements ARB identifies for the program into annual reductions will depend on the details of AB 398 implementation.

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