Resources for the Future Inc.

07/31/2024 | Press release | Distributed by Public on 07/31/2024 07:18

Comments on Potential Amendments to California’s Cap and Trade Regulation

Comments on Potential Amendments to California's Cap-and-Trade Regulation

This comment to the California Air Resources Board analyzes proposed changes to the state's cap-and-trade program.

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Date

July 31, 2024

Publication

Testimony and Public Comments

Reading time

1 minute

The California Air Resources Board (CARB) hosted a workshop on July 10 that identified three different emissions budget pathways for upcoming rulemaking that would achieve the same cumulative emissions reductions by 2045. Resources for the Future analyzed each budget's impact on auction revenue assuming, given the presence of a robust allowance bank, that compliance behavior and allowance prices would be equivalently determined by the fundamental cumulative allowance supply. Compliance behavior and price formation may differ from this due to uncertainty and market psychology.

The two accompanying analyses reach three findings.

  1. Over the next five years, CARB's identified Smoothed Option 1, which would have a slower reduction in the emissions budget before 2030, would yield about $100 million dollars more revenue to the Greenhouse Gas Reduction Fund (GGRF) in 2026, rising to nearly $1 billion more revenue in 2030 than the other options. In the long term through 2045, cumulative revenues from Smoothed Option 2 and the original Standardized Regulatory Impact Assessment (SRIA) budget are larger than Smoothed Option 1. However, near-term revenues may be more important to fund investments to accelerate the energy transformation, especially given California's current budget deficit. Smoothed Option 1 would also sustain a decline each year in the annual emissions budget, initially at a slower rate than the alternatives.
  2. The addition of an Emissions Containment Reserve (ECR) would support allowance prices when they are low and increase revenues for the GGRF. We find the ECR could boost cumulative GGRF revenues by $3.5 billion by 2030. Through 2045, GGRF revenues could increase by over $21 billion.
  3. The update to the cap-and-trade regulation and change in allowance supply will initially increase uncertainty for market participants who must adjust expectations about the trajectory of allowance prices. Unlike the price floor, which is seamlessly integrated into the auction settlement procedure, the operation of the allowance price containment reserve (APCR) and price ceiling are not directly integrated into the auction and have not been tested. We encourage CARB to focus a workshop on the operational design of cost containment features during the ongoing effort to update the program.

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