Advisors back cap-and-trade extension for California

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California’s Legislative Analyst’s Office (LAO) has recommended the state legislature authorise its cap-and-trade programme to continue after 2020, although with certain changes such as a stronger price ceiling and less strict guidelines on how to spend auction revenues.

The nonpartisan agency, which provides fiscal and policy advice to state legislators, concluded in a report released Monday that using a market-based mechanism would be the most cost-efficient way to meet California’s greenhouse gas target.

“We recommend the legislature authorise a market-based mechanism to meet its 2030 GHG goals. This could be either a cap-and-trade programme, as proposed by the governor, or a carbon tax,” it said.

“Without a market-based approach, the state would likely have to implement more costly policies. Given the advantages of such an approach, the legislature might want to direct the administration to implement cap-and-trade (or a carbon tax), rather than simply providing it the option of implementing it as is the case under current law.”

The lack of clarity on what will happen to the programme after 2020 has brought uncertainty to Californian market, exacerbated by an ongoing lawsuit initiated by some corners of industry that claim the state government does not have the right to raise revenue through CO2 permit auctions.

Additionally, last week three state lawmakers that advocate environmental justice introduced a bill that would see direct regulation play the biggest part in cutting carbon emissions, relegating the market to a secondary role.

Regulators Air Resources Board (ARB) are currently considering five options as part of its Scoping Plan to meet the state’s 2030 emissions reduction targets, including carrying on with the market or replacing it with a tax regime or direct regulation.

The LAO report said that while it is possible to extend the programme with a simple majority, legislators should approve the extension by a two-thirds majority to underpin the system’s legal certainty – the threshold required to pass bills that amount to new revenue-generating taxes in the state.

CHANGES

However, the report stressed that some adjustments should be made to the cap-and-trade programme if it is to continue in its current form.

It said the system’s price containment mechanism should be bolstered in order to avoid price spikes, which the LAO considered more likely in the future as emissions become more expensive to cut.

The California programme currently has three trigger levels currently in the $51-63 range that would require regulators to release a specified number of additional permits into the market at a fixed purchase price.

LAO said this number should be increased and the price levels be defined more clearly.

That might lead to an increase in emissions from the programme, which the report said could be addressed by the state “potentially using some of the auction revenue from the sale of the additional allowances to purchase less costly allowances in other jurisdictions.” It did not give examples of these other jurisdictions, but the northeastern RGGI market would presumably be seen as a prime candidate to provide additional supply.

Regulators should also let allowance sale proceeds be used for a broader set of purposes including issues not related to climate policy, LAO said.

However, lawmakers should specify which programmes are to receive funding from cap-and-trade revenue rather than leaving that to the Department of Finance, as is the case now.

The report also said lawmakers should reject the current proposal from Governor Jerry Brown that of the $2.2 billion in revenue California plans to spend in fiscal 2017-18, $1.3 billion would only be paid out once legislators approve the programme’s extension.

By Stian Reklev – stian@carbon-pulse.com

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