Executive Summary and Key Recommendations
The California Cap and Trade Program plays a pivotal role in the state’s efforts to reduce greenhouse gas emissions. A review of the program ahead of the upcoming 2025 compliance period has opened a critical window of opportunity to address and correct the program’s recognized shortcomings. In this policy brief, we outline three crucial enhancements to improve the effectiveness of the program in advancing California’s climate goals.
First, we propose a mechanism for reducing the number of allowances or pollution permits in the market when prices are low; low prices reflect the excessive supply of pollution permits. The mechanism, called an Emission Containment Reserve (ECR), lowers the supply of allowances when the carbon price reaches a critical trigger level. This step is essential for fostering a more balanced and efficient carbon market.
Second, we recommend phasing out offsets as compliance instruments. Empirical evidence suggests that offsets have not provided reliable emissions reductions. We also provide suggestions for potential alternative instruments, including insets. This strategic shift aims to enhance the overall impact of the program.
Finally, we advocate for a gradual reduction and the ultimate phaseout of subsidies provided through the free allocation of allowances. This significant move will redirect funds toward the development of carbon-free technologies, further advancing the program’s environmental objectives.
We welcome comments, questions, and feedback about this policy brief. Please reach out to us at info@theclimatecenter.org.
