Cap–and–Trade Regulation Key to Meeting Emissions Goal. California’s cap–and–tradeprogram to significantly reduce greenhouse gas (GHG) emissions by 2020 has two major components: (1) the regulation and (2) auction revenue. The relationship between these two components is complex, from both a policy and legal perspective. From a policy standpoint, the regulation is intended to ensure the state meets its GHG goals and provide an incentive forcost–effective emission reductions. A well–designedcap–and–trade regulation also generates auction revenue even though generating revenue is not a primary goal of the program.
Requirement to Spend Auction Revenues on GHG Reductions Creates Policy Challenges. Under current law (and potentially under future court decisions), the state can only spend auction revenue on activities that facilitate GHG reductions. However, this requirement creates some significant policy challenges. First, spending auction revenue on GHG reductions is likely not necessary to meet the state’s GHG goals and likely increases the overall costs of emission reduction activities. This is because, in certain cases, spending on GHG reductions interacts with the regulation in a way that changes the types of emission reduction activities, but not the overall level of emission reductions. Second, the requirement to spend on GHG reductions limits the Legislature’s flexibility to use the revenue in a ways that could achieve other goals, such as (1) offsetting higher costs for households and businesses associated with higher energy prices; (2) promoting other climate–related policy goals, such as climate adaptation activities; or (3) promoting other legislative priorities unrelated to climate policy.
Strategies to Promote Legislative Priorities. In light of these challenges, we present alternative strategies designed to help the Legislature promote its priorities more efficiently under two alternative scenarios:
Under a Requirement to Spend on GHG Reductions. Strategies that can be utilized under a legal framework which requires that revenues be spent on activities that facilitate the reduction of GHGs include (1) targeting uncapped emission sources, (2) targetingcost–effective emission reduction activities, (3) prioritizing other legislative goals, and (4) offsetting other state spending. Each of these strategies would help promote different legislative priorities and present different levels of legal risk.
Removal of Requirements to Spend on GHG Reductions by ReauthorizingCap–and–Trade With Two–Thirds Vote. Removing the legal requirement to spend on GHG reductions would (1) provide the Legislature maximum flexibility to provide rebates or tax reductions to offset costs for households and businesses and/or use the funds to address its highest policy priorities, and (2) reduce legal uncertainty regarding the regulation beyond 2020. Moreover, as long as a well–designedcap–and–trade regulation is in place, the state will likely meet its GHG emission targets from major sources of emissions.