California has some of the world’s most extensive policies for slashing greenhouse gas emissions, including regulations on vehicle tailpipes and requirements for renewable energy. But none of them has drawn as much attention as the cap-and-trade program, which requires companies to buy permits to release emissions into the atmosphere.
It’s a complex system intended to provide a financial incentive for oil refineries, food processors and other industries to clean up their operations, and state lawmakers are debating whether to extend the program. Although many of the proposals are highly technical, they could have a dramatic effect on the state’s fight against global warming.
Here’s a look at how cap and trade works now and how it could work in the future:
What kinds of pollution would be targeted?
- Right now, cap and trade is focused on reducing greenhouse gases such as carbon dioxide and methane.
- These emissions contribute to global warming, but they’re not the type of pollution responsible for air quality issues that contribute to public health problems such as asthma.
Assembly Bill 378
- This proposal would modify the program so it also limits criteria pollutants, including smog-causing nitrogen dioxide, and toxic air contaminants, such as perchloroethylene from some dry cleaning operations.
- Companies would face stricter rules on greenhouse gases if they violated regulations on other kinds of pollution.
How much would emission permits cost?
- Companies bid on the permits in state-run auctions and the minimum price is currently about $13 per metric ton of greenhouse gases.
- Permits can also be traded on a secondary market, allowing companies to sell excess permits or obtain more if needed.
- The state also distributes a limited number of permits for free to help industries comply with regulations.
- Analysts are concerned that prices have been too low to persuade companies to reduce their emissions to avoid needing to buy permits.
Senate Bill 775
- This proposal would set stricter rules for minimum and maximum prices of permits during state auctions, and the prices would increase annually at steeper rates.
- In 2021, bids would need to stay between $20 and $30. By 2030, the price range would be between $60 and $120.
- No permits would be distributed for free.
- Supporters of the proposal believe the higher prices would provide a better financial incentive for companies to clean up their operations.
How much money would be generated and where would it go?
- Annual revenue from cap and trade has ranged from several million dollars to more than $1 billion in recent years, although there’s potential for much higher amounts if permits become more costly.
- The money can only be spent on initiatives that reduce greenhouse gas emissions, such as rebates for electric cars and affordable housing near mass transit.
- Gov. Jerry Brown has also used some of the money to build the bullet train from Los Angeles to San Francisco.
Senate Bill 775
- Legislative analysts have not estimated how much revenue the proposal could generate, but it could reach tens of billions of dollars because of escalating prices.
- Money would be allocated to environmental projects, scientific research and rebates to Californians, but it hasn’t been decided how much would go to each.
- The rebate, called a “climate dividend,” would help offset higher costs for gasoline and electricity that could result from state regulations.
How would the program help the state meet its emission goals?
- Right now the state sells a limited number of permits in auctions, no matter the price that companies bid.
- This allows cap and trade to act like a backstop, assisting the state’s ability to meet its goal for reducing emissions by 2030.
- Critics fear wide fluctuations in revenue and the potential for price spikes if permits become much more valuable.
Senate Bill 775
- This proposal would require the state to sell an unlimited number of permits if the price reaches the maximum level.
- By making this change, supporters say there would be less chance for price spikes during auctions or in the secondary market.
- Opponents say this would make the program function more like a tax and provide less certainty that the state will meet its goals.
How would the program support other environmental projects?
- Instead of buying emission permits or reducing their own emissions, companies can comply with regulations by financing offsets, which are projects intended to reduce greenhouse gases elsewhere.
- The most popular offsets involve preserving forests. Others include turning methane from cow manure into electricity or destroying chemicals that would otherwise escape into the atmosphere.
- Because climate change is a global problem, supporters say reducing emissions anywhere is helpful. Offset credits can also be cheaper than permits, providing a less expensive option for companies.
AB 151 and SB 775
- Opponents of offsets are skeptical of their environmental benefits or dislike the opportunity for California companies to meet their obligations without changing their own operations.
- There’s also opposition because offsets can be financed anywhere in the country. AB 151 would encourage companies to develop offsets in disadvantaged communities.
- SB 775 would go a step further, preventing the use of any offsets to comply with regulations.
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