Ready, fire, aim: ARB’s overallocation report misses its target

Executive summary

ARB’s April 2018 Staff Report fails to “[e]valuate and address concerns related to overallocation” in the cap-and-trade program, as required by AB 398. Despite widespread concern that overallocation could cause emissions to exceed California’s legally binding 2030 limit, the Report does not actually analyze this key question. More troublingly, the Report makes a fundamental methodological error that ARB specifically warned against in its original 2010 cap-and-trade regulatory process; once corrected, the Report’s method leads to the conclusion that overallocation will cause the state to exceed its 2030 emissions limit.

Calculated reductions from cap-and-trade, 2021 through 2030 (MMtCO₂e)

ARB’s uncorrected estimates suggest that whether or not there are 150M overallocated pre-2021 allowances, the cap-and-trade program will deliver at least as many reductions as called for in the Scoping Plan. Once corrected for ARB’s error, however, the Report’s analysis indicates that the status quo market design is expected to fall short of the Scoping Plan’s requirement—with or without 150M overallocated allowances.

Summary

Last year’s cap-and-trade extension bill, AB 398, directs the California Air Resources Board (ARB) to “[e]valuate and address concerns related to overallocation in the state board’s determination of the number of available allowances for years 2021 to 2030, inclusive, as appropriate.” Allowance overallocation is a critical issue because it could undermine the effectiveness of the cap-and-trade program. ARB’s 2017 Scoping Plan calls on the cap-and-trade program to deliver over 45% of the annual GHG emission reductions needed to achieve California’s 2030 climate target.

In April 2018, ARB staff released a report (hereinafter, the “Post-2020 Caps Report” or “the Report”) that provides the Board’s first official response to AB 398’s statutory direction to evaluate and address concerns related to overallocation. The Report dismisses overallocation as a problem, but suffers from two major shortcomings.

First, the Report does not address the primary concern related to overallocation—namely, the risk that excess allowances will be banked and used such that emissions in 2030 exceed the state’s legally binding emissions limit. Instead of evaluating whether overallocation could lead to 2030 GHG emissions exceeding the state’s climate target, ARB calculated the cumulative balance of market supply and demand over a ten-year period. This method is insufficient to address the serious risks LAO and independent researchers have identified. As a result, the Post-2020 Caps Report does not provide a reasoned basis for responding to AB 398’s instruction to “evaluate and address concerns related to [allowance] overallocation” in its rulemaking process.

Second, the Report incorrectly asserts that overallocation of up to 150 million pre-2021 allowances will not impact the state’s ability to meet its 2030 climate target. The Report contains a fundamental analytical error that undermines its own conclusion. Once corrected for this factual error—using the same method the Board adopted in its original cap-and-trade rulemaking—the Report shows that the cap-and-trade program is expected to deliver significantly fewer emission reductions than what the Board called for in the 2017 Scoping Plan.

This error is not an esoteric technical detail. It is a question of basic emissions accounting. ARB properly addressed these issues when the Board set the original program caps in a 2010 rulemaking, observing that projections of “covered sector” emissions have to be adjusted downward to account for the fact that “covered emissions” subject to the cap-and-trade program are smaller than total “covered sector” emissions (see Appendix). Given the fundamental importance of cap-setting to the environmental and economic performance of California’s cap-and-trade program, the lack of substantive analysis in the Report is striking—especially in comparison to the Board’s prior efforts to analyze the same question in 2010.

We hope that ARB will acknowledge the shortcomings of its new Report, improve its analytical standards to maintain the scientific integrity for which the Board is known, and seriously engage the well-founded concern that overallocation risks undermining California’s 2030 climate target.

Download the full report and accompanying data set.