Keep Calm and Lower the Cap

The California Air Resources Board released yesterday the results of the latest quarterly auction of emission allowances pursuant to the cap-and-trade program, a cornerstone of California’s plan to slash carbon pollution and implement the goals of the Global Warming Solutions Act of 2006 (AB 32). Unlike the previous 14 auctions, which in all but one instance sold out of the “current vintage” allowances (eligible for use in the compliance year in which they were purchased), this time around none of the state-owned allowances offered for sale by ARB were purchased.

So what gives? Several factors are likely at play, but it’s important to remember that from an environmental standpoint it’s the declining cap—not the price or number of allowances sold at auction—that drives emissions reductions. That is the purpose of the program, not raising revenue.

In fact, the unsold state-owned allowances have effectively tightened the cap until prices rise again above the floor price for two consecutive auctions. This is a built-in design feature that ensures those allowances are available when demand increases, but prevents the market from being oversupplied when demand is low, as reflected in the results today.

But part of why demand has fallen off is indeed troubling—and that is the current uncertainty about the cap-and-trade program after 2020, the last year for which program rules are currently in place. Coupled with ongoing litigation about whether selling allowances constitutes in illegal tax (hint: it does not), it’s not altogether surprising that the market is treading lightly in purchasing compliance instruments beyond what they need in the short term.

It’s time for state leaders to come together to ensure the Golden State retains its climate leadership mantle and associated benefits for its citizens.

About the Authors

Alex Jackson

Senior Attorney, Climate & Clean Energy Program

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