United states carbon cap-and-trade program
Cap and trade is an approach that harnesses market forces to reduce emissions cost-effectively. Cap and trade allows the market to determine a price on carbon, and that price drives investment decisions and spurs market innovation. Cap and trade differs from a tax in that it provides a high level of certainty about future emissions, but not about the price of those emissions carbon taxes do the inverse. A cap may be the preferable policy when a jurisdiction has a specified emissions target. By letting the market set a price on carbon, emissions can be reduced in the most cost-effective way.
For example, European countries have operated a cap-and-trade program since Several Chinese cities and provinces have had carbon caps since , and the government is working toward a national program. Mexico is running a pilot cap and trade that the country hopes to bring into force in Efforts to create a nationwide cap-and-trade system in the United States led to House passage of the American Clean Energy and Security Act commonly called the Waxman-Markey bill, after its lead authors in , but the effort died in the Senate.
Regional, national and subnational carbon pricing initiatives implemented, scheduled for implementation and under consideration ETS and carbon tax. See the interactive Carbon Pricing Dashboard. Carbon Pricing Watch World Bank, Ecofys, In a cap-and-trade system, the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap.
Emitters must hold allowances for every ton of greenhouse gas they emit. Companies may buy and sell allowances, and this market establishes an emissions price. Companies that can reduce their emissions at a lower cost may sell any excess allowances for companies facing higher costs to buy. Beyond these basics, policymakers must consider a range of design choices that can influence the cost of compliance and the distribution of these costs in society. Complementary Policies — Will cap and trade be the primary policy tool for reducing emissions or will it stand alongside other policies like renewable portfolio standards or vehicle efficiency standards that also help achieve climate goals?
Complementary policies will influence the carbon price and the pace of emissions reduction. Computer modeling and other analytical techniques can provide guidance to policymakers on the costs and results of different sets of climate action.
Scope — What emission sources and greenhouse gases will be covered by the cap? For example, RGGI covers CO 2 from power plants while California covers several greenhouse gases from power plants, manufacturing facilities, transportation, and buildings. For administrative ease, programs tend to include only the largest sources of greenhouse gases in the economy. Target — What level of emissions reduction will be required and by when?
Allowance Allocation — How will allowances be distributed? A pair of laws established guidelines on how this annual revenue is disbursed. The two laws do not identify specific programs that would benefit from the revenue, but they provide a framework for how the state invests cap-and-trade revenue into local projects. AB , which Gov. Jerry Brown signed on July 25, , further clarifies the priorities for investments as:. Tags Cap and Trade Carbon Pricing.
California Cap and Trade. California Greenhouse Gas Emissions by Sector in The regulation has been amended periodically since then. The legislature authorized an extension of the program through in Phase 1 Electricity generation, including imports Industrial sources Sectors Covered: Phase 2 onward Includes sectors covered in Phase 1, plus: Distributors of petroleum Distributors of natural gas Point of Regulation Electricity generators within California Electricity importers Industrial facility operators Fuel distributors Allowance Allocation Distribution Method Free allocation for electric utilities, industrial facilities and natural gas utilities investor-owned utilities must sell free allowances and redistribute funds to customers Free allocation to utilities declines over time Other allowances must be purchased at auction or via trade Allocation Methodology Industry: Based on output and sector-specific emissions intensity benchmark that rewards efficient facilities Electricity: Based on long-term procurement plans Natural gas: Based on sales Auction Quarterly, single round, sealed bid, uniform price Price minimum: Beginning in a hard price ceiling will be set, and an unlimited supply of allowances will be available at this price.
However, regulated entities are subject to holding limits, restricting the maximum number of allowances that an entity may bank at any time. Borrowing Borrowing of allowances from future years is not allowed. Beginning in at least half the offsets used for compliance must come from projects that directly benefit California.
Protocols currently exist for: Offset projects may be located anywhere in the U. Strategic Reserve A percentage of allowances is held in a strategic reserve by CARB in three tiers with different prices: The strategic reserve will help constrain compliance costs by adding supply to the market when prices would otherwise be above the tiers.
Compliance Period 3-year compliance periods following 2-year Phase 1 , with a partial surrender obligation due each year. Emissions Reporting and Verification Reporting Covered entities must report annually as required since Registration Covered entities and other participants must register with CARB to participate in allowance auctions. Verification Reported emissions must be verified by a third party.
Noncompliance If a deadline is missed or there is a shortfall, four allowances must be surrendered for every metric ton not covered in time. Trading and Enforcement The regulation expressly prohibits any trading involving a manipulative device, a corner of or an attempt to corner the market, fraud, attempted fraud, or false or inaccurate reports.