Exploring the Interaction Between California’s Greenhouse Gas Emissions Cap-and-Trade Program and Complementary Emissions Reduction Policies

California enacted Assembly Bill 32 (AB 32) to address climate change in 2006. It required the California Air Resources Board (ARB) to develop a plan to reduce the State’s greenhouse gas (GHG) emissions to 1990 levels by 2020. ARB developed a plan (i.e., the “Scoping Plan”) made up of a GHG emissions cap-and-trade program and regulatory measures known as “complementary policies” (CPs) to achieve the 2020 target. The CPs, which were designed to achieve climate policy and other important policy objectives, targeted emissions from sectors covered by the GHG cap-and-trade program and those not covered by the program. ARB estimated that the CPs would achieve approximately 80% of the emissions reductions required to achieve the 2020 emissions target. Other jurisdictions, including the European Union, Australia, and the states that make up the Regional Greenhouse Gas Initiative, have developed a similar hybrid policy approach to achieve climate policy objectives.

Although this approach has been widely used to address climate change, little analysis has been undertaken on the interactions between CPs and GHG cap-and-trade programs and their impacts on program costs and covered entities. The report concludes that the performance of CPs in achieving emission reductions will have a significant impact on the level of abatement that covered sources will need to achieve to meet the fixed emissions cap in the GHG cap-and-trade program and on expected GHG emission allowance prices. In addition, the potential variance in the performance of CPs and other variables, and recent regulatory decisions that have been made regarding program implementation, will complicate the efforts of electric companies to develop an effective risk management strategy to comply with the program. Conclusions regarding the directional impacts of varying levels of CP performance on emission reduction requirements and allowance prices in California’s cap-and-trade program likely will be applicable to other jurisdictions employing the same policy model to address climate change.