California’s Cap-and-Trade a Versatile Tool for Environmental Policies
Governor Brown signed a budget last week that lays out for the first time how to invest the millions from California’s landmark cap-and-trade program ($734 million so far). California has shown another way that cap-and-trade is like the Swiss army knife of environmental policies: a versatile tool known for its usefulness and adaptability.
A Multi-faceted Investment Portfolio
California will invest $850 million over the next year to reduce dangerous climate pollution, a portfolio of investments that will benefit almost every part of California’s economy, going to low-carbon and public transportation, weatherization and energy efficient buildings, water efficiency, waste diversion, and natural resources like urban forests. Substantial investments, at least 25% of the total, will be directed to benefit disadvantaged communities most likely to be impacted first, and worst, by climate change.
Research has shown that the green economy is a solid investment since it already grows faster and is more resilient than traditional economic sectors (the San Joaquin Valley saw a 133% growth in employment in seven “green economy” sectors between 1995 and 2010). The budget also creates long-term guidelines for investing in the green economy as the stream of revenue grows in coming years.
Where the Revenue Comes From
California already limits, or “caps,” total carbon pollution from industries like cement manufacturers and food processors, as well as utility companies. Next year, the cap will expand to include transportation fuels and natural gas providers– two of the biggest polluting sectors in the state. The dollars California is investing are generated by holding these polluters accountable for their impact on the environment.
Here’s how it works: California’s cap-and-trade program includes a quarterly auction that gives large polluters the ability to purchase “allowances” for every ton of carbon dioxide they emit. The number of allowances is “capped” and declines over time. The “trade” creates a market for carbon allowances, helping companies innovate in order to meet, or come in under, their allocated limit. The less they emit, the less they pay, so they have an incentive to pollute less.
Even more Hidden Features
While the funds invested through this budget derive from allowances sold to the industrial and fuels sectors, Investor Owned Utilities (IOUs) get allowances for free but then must sell them at auction and use the resulting funds for the benefit of customers. The largest portion of these funds goes to a climate credit for residential customers, seen on their utility bill twice a year. For most customers this will be enough to offset any electricity price increase from the cap-and-trade program. Customers are encouraged to use this ‘climate credit’ to invest in long-term savings through energy efficiency upgrades.
California also recognizes it can fight climate change more effectively with partners. For this reason, it recently joined with Quebec in an effort to broaden the base of pollution reductions, starting this year. Despite the great similarity between the California and Quebec systems, each jurisdiction uses the revenue generated from their program in whatever way they see fit.
These lessons couldn’t come at a better time, as other states consider how to best comply with EPA’s Plan, a customizable, multi-tool approach to pollution reduction. As they develop their plans, states should factor in the many opportunities to partner with other jurisdictions, as well as design programs that meet both local and national needs and priorities. If they are looking for an example, California has shown there are a multitude of quality tools to choose from.
Erica Morehouse is an attorney with the EDF, where she has been since 2009, focusing on transportation and the policy and legal aspects of implementing California’s landmark Global Warming Solutions Act of 2006 (AB 32).
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