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California Legislature Passes 10-Year Extension to Cap and Trade

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  • Aug 4, 2017

Success in the legislature:

After weeks of negotiations in the California legislature, the Senate and Assembly passed an extension to cap and trade on July 17. This is a win for California’s climate leadership and for green building. USGBC actively supported the cap-and-trade extension, as one of the state’s key strategies to reach its SB 32 goal to reduce emissions by 40 percent from 1990 levels by 2030.

The extension package includes two bills: AB 398 extends and modifies the cap-and-trade bill that took effect in 2012 and AB 617 adds provisions for air quality control in priority areas. AB 398 was signed into law this week by Gov. Jerry Brown in San Francisco, and AB 617 was signed near Los Angeles. The modifications to cap and trade will take effect in 2020 and continue through 2030.

Learn more about how cap and trade works.

Air quality controls

To address the issue of air quality in at-risk communities, AB 617 puts the Air Resources Board (ARB) in charge of monitoring pollutants across the state and proposing pollution control technologies and community emissions reduction programs in the highest-priority locations, as well as providing grants and technical assistance.

Local air districts will not be permitted to impose additional mandates for CO2 reduction; however, they may still impose mandates for non-CO2 pollutants. Additionally, they will be responsible for planning the implementation of the technologies recommended by ARB to industrial plants and refineries, if the local communities experience pollution levels above the set limits.

The new law continues to charge ARB with allocating 1-ton allowances, some free and others via auction, to companies regulated under the cap. Although free allowances have been criticized for making it too easy for businesses to comply and for weakening the market signal, they also make it easier for in-state businesses to compete in out-of-state markets. ARB will be reducing the distribution of free allowances over time, increasing the investments in real reductions.

Carbon offsets

Another pathway for companies regulated under the cap to meet their reduction targets is through the purchase of carbon offsets. If regulated properly, however, offsets can provide valuable climate impacts and give flexibility to the cap-and-trade program. Currently, only 8 percent of any company’s total needed allowances may be achieved through offsets, which will be reduced to 4 percent in 2020 (rising back up to 6 percent in 2026 to reflect the expected increase in carbon pricing).

To encourage local pollution reduction, at least half of the maximum offsets must be through programs that directly reduce emissions in-state. The Compliance Offsets Protocol Task Force under ARB will identify acceptable programs, prioritizing ones that benefit disadvantaged, tribal and agricultural communities.

One of the discussed provisions that did not make it to the approved law is a border adjustment tax. Some argue it would create political friction and have too many logistical complications. To compromise, the bill requires ARB to report carbon leakage and submit a report to the legislature with suggestions for reduction, mentioning the possibility of a border adjustment in the future.

In the larger picture, the greenhouse gas emissions that the cap-and-trade program will save are small in comparison to global emissions. However, if the California cap and trade is successful, it will serve as a scalable and exportable model within the U.S. and, potentially, the world.

Learn more about California’s green leadership

By Kevin Keene

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