California proposes ambitious overhaul of cap-and-trade programme
Bob Wieckowski, a Democrat senator in California, has proposed ambitious legislation that aims to introduce aggressive carbon cap and trade targets. At present, the state of California holds quarterly auctions of carbon allowances for large power plants, factories, and fuel distributors with a rising price floor, which sits at $13.57 per metric ton. Sen. Wieckowski's proposed system suggests a "price collar" that sets the price of a metric ton of CO2 at $20-$30 in 2021, rising to $20-$40 in 2022, rising each subsequent year by $5 for the floor and $10 for the cap, relative to inflation.

"This new post-2020 cap-and-trade program illustrates the California State Senate’s commitment to expanding California’s clean energy economy, protecting [the] health and welfare of Californians, and lowering pollution in all parts of the state," said Sen. Bob Wieckowski, a Democrat representing part of the Bay Area, during a press conference on Monday afternoon.

Cap-and-trade systems are market-based mechanisms that allow companies to bid on a limited number of allowances for producing greenhouse gases, which tick down over time to lower total emissions. Under the program that first went into effect in 2013, California holds quarterly auctions for large power plants, factories, and fuel distributors with a rising price floor, which currently sits at $13.57 per metric ton. Most of those funds are allocated for green projects in the state.

In its current form, Sen. Wieckowski's proposed system would establish a so-called price collar that sets both a floor and ceiling for the price of a metric ton of carbon dioxide. The price collar would start at $20 and $30 in 2021, rise to $20 and $40 in 2022, and then tick up each subsequent year by $5 and $10, respectively, plus inflation adjustments. The ceiling would immediately be higher than the price of carbon in most European nations, and would quickly exceed the roughly $37 tax proposed in Canada starting in 2022. At some point in the 2030s, assuming no other changes, it would also surpass Sweden’s carbon tax of around $150 per metric ton, which is the most expensive in the world.

California’s existing cap-and-trade system was initially seen as a model for other states. But it’s struggled through a series of challenges, including a California Chamber of Commerce lawsuit arguing that it amounts to an illegal tax, an ongoing debate over whether it has the authority to continue operating past 2020, and low demand amid uncertainties about the system’s future.

The new program should make the auction function more effectively by clearing up the legal standing, eliminating the banking of allocations for use in subsequent years, and providing insight into the price trajectory over time, says Adele Morris, policy director for the climate and energy economics project at the Brookings Institute.

Because it raises revenue, passage of the new measure will require two-thirds majority approval in both branches of California’s legislature. But supporters believe it could pass, as Democrats currently enjoy a slim supermajority in the State Assembly and Senate. In addition, the price ceiling and market mechanisms may help bring along some moderate Republicans, while the direct rebates to consumers could prove popular among voters.

"That's the key to deep decarbonization: making carbon pricing work for everyone," wrote Danny Cullenward, a Stanford lecturer and energy economist who acted as an adviser to Senate leaders on the legislation, in an email interview.

The climate dividend would be given directly to consumers following each quarterly auction, though the exact delivery mechanisms still need to be determined.