With the Trump administration turning back the clock on federal climate-change policies and threatening to withdraw from the Paris climate agreement, the role played by California is more important than ever.
California’s greatest impact on reducing the threat of climate change is not through its emissions reductions – the state accounts for less than 1 percent of the global total. Rather, California’s most profound impact is through its policy leadership: showing other jurisdictions, ranging from Canadian provinces to countries like China and Korea, how to design and implement scientifically sound, economically sensible and politically pragmatic policies. The state’s innovative cap-and-trade system has become an admired and imitated model across the United States and around the world.
Unfortunately, action by the California Senate may threaten this leadership. Like efforts in Washington to undo Obamacare, state Senate Bill 775 is, in effect, a “repeal and replace” of the state’s effective and low-cost cap-and-trade system. The current program is not broken. In fact, it is the most carefully designed cap-and-trade system in the world. California’s greenhouse gas emissions are declining, and compliance is near 100 percent.
The SB 775-proposed 2020 replacement will offer neither emissions reduction certainty nor revenue stability. Because of the absence of banking or borrowing, the use of annual compliance periods, and a widening price collar, great post-2020 price volatility could be introduced. Also, because the bill does not allow allowances from the current system to be used after 2020, allowance prices will be driven to zero as 2020 approaches, jeopardizing California’s ability to achieve its short-term targets.
Considerable concern has been voiced about allowance prices that have hovered at or near the minimum allowed by the cap-and-trade system. But the main cause of these low allowance prices is the presence of other, so-called “complementary policies,” such as renewable electricity policies, energy efficiency standards, and the Low Carbon Fuel Standard, which have had the effect of relocating – rather than reducing – carbon dioxide emissions, increasing abatement costs and suppressing allowance prices. If California is to achieve the very aggressive targets it has set for 2030 and beyond, it must increase its reliance on its cost-effective cap-and-trade system, not turn away from it.
The current system successfully addresses competitiveness effects on key energy-intensive, trade-sensitive sectors by allocating free allowances based on the previous year’s production levels. This becomes a production subsidy and removes the incentive for these firms to relocate their production to other jurisdictions that have less stringent climate policies. The Senate’s proposed replacement package instead institutes a carbon tax on products imported into the state, but this affects only the production of products used within the state, not products that are marketed in other states and other parts of the world. Whether the tax would even be constitutional under U.S. law is an open question.
Because of its success, California has been attracting more partners. Links with a nearly identical trading program in Quebec, a new link with Ontario and a host of other linkages in the works bring down costs and improve performance by limiting the market power of individual firms and reducing price volatility. Regardless of whether the Trump administration abandons the Paris agreement, California’s links with other sub-national, national and regional jurisdictions will be even more important. The Senate proposal would end all of these linkages.
California should be proud of the progress it has made with its carbon dioxide cap-and-trade system, while maintaining openness to program modifications that will improve its performance post-2020. Unfortunately, SB 775 would throw out the baby with the bathwater and thereby severely retard California’s valuable climate leadership.
Robert Stavins is a professor of business and government a the John F. Kennedy School of Government at Harvard, and former chairman of the U.S. EPA Environmental Economics Advisory Committee. He can be contacted at email@example.com.