As expected, auction results from California’s market-based cap-and-trade program have stabilized, allowing the state to propose an expenditure plan consistent with past years’ levels. Governor Newsom anticipates approximately $1.369 Billion through budget year 2021-22. The cap-and-trade expenditure plan proposes three categories of spending: 1) equity programs; 2) low carbon transportation and zero emission vehicle strategy; and 3) natural and working lands. A breakdown of this proposal is included in the following graphic:
Despite this anticipated result, at the end of last year opponents of cap-and-trade suggested that low auction results, which are expected to occur as emissions reduce over time, meant that the cap-and-trade system was “broken” and was in need of significant overhauls. These arguments were primarily spurred by low emissions and concurrent low auction results, which happened during early economic shutdowns as a result of the COVID-19 pandemic. This is how a capped system of emissions and the trading of excess emissions works, and was not a surprise to those who follow cap-and-trade closely.
The Governor’s budget shows that cap-and-trade is working as designed, placing a cap on emissions limits and using the auctions of excess emissions to fund local community programs, spur technological development, and assist small businesses in transitioning to lower fuel technology to the tune of over $1.3 Billion through 2022.
As the state moves toward reduced emissions, we expect auction results will likewise be reduced. The legislature would be wise to not be reactive to this well-designed program, which was just readjusted by the Air Resources Board in a robust stakeholder process just a few years ago and continues to generate funding for programs to fund technological advancement. Most importantly, the market-based mechanism provides companies with financial incentives to emit less and achieve earlier reductions while keeping production costs—and the ultimate cost to consumers—lower.