Cap-and-Invest and environmental integrity

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OPINION – The California Legislature recently reauthorized its Cap-and-Trade system with a new moniker “Cap-and-Invest,” which is somewhat of a misnomer because the prior reauthorization in 2017 abandoned the system’s binding emissions cap in favor of a binding price ceiling. A 2023 study performed by UC Davis under contract with the California Air Resources Board (CARB) projected allowance prices at the ceiling (currently $95) as early as 2025, implying that the cap would be breached. But the November 19 auction closed at only $28.32, close to the price floor of $25.87, which would be insufficient to cover the SB-840 budgetary appropriation. The previous market high was $41.76 in early 2024.

Price projections are all over the map. In contrast to the UC Davis study, a more recent analysis by Greenline Insights and Environmental Defense Fund (EDF) projects allowance prices at the floor between 2030 and 2040 under CARB’s current proposed allowance budgets. Other market analysts project allowance prices in 2030 in the range $68-$101. (KraneShares 9/30/2025 webinar, Slide 13)

Unpredictability and market volatility impede long-term investments in decarbonization and play havoc with programs that depend on Cap-and-Trade revenue. A variety of price-control mechanisms have been progressively incorporated in Cap-and-Trade to try to stem the chaos, beginning with a recommendation of CARB’s Market Advisory Committee (MAC), in a June 30, 2007 report, to institute a price floor (Section 6.4.2):

“… While a price ceiling could jeopardize environmental integrity and reduce the return on investments in clean technologies, a price floor would reinforce environmental integrity and the value of clean investments. The Committee encourages CARB to consider enforcing a price floor.”

CARB instituted a price floor starting at $10 in 2012 and increasing by 5% annually, copying identical provisions in the 2009 federal Waxman-Markey bill for a national Cap-and-Trade system. And despite the MAC’s expressed concern about environmental integrity, the 2017 reauthorization mandated a price ceiling. CARB set the ceiling initially at $61 in 2021 based on a conservative estimate of the social cost of carbon at the time (although staff recognized that the SCC could actually be closer to $220).

EDF recently raised concerns about the environmental integrity of Cap-and-Invest in a comment letter for CARB’s 10/29/2025 C&I Workshop (page 6):

“As CARB considers updates to the Cap-and-Invest Program, maintaining the environmental integrity of the cap must remain a central priority. The program’s credibility and its ability to ensure California meets its climate goals depends on the certainty that total emissions remain within the statutory limits the state has set. …”

However, the price ceiling precludes a binding cap. CARB never sets GHG caps to guarantee attainment of any particular climate goal; allowance budgets are always based on policymakers’ estimation or perception of what the state can afford and is willing to pay. Trying to push CARB to adopt more ambitious policies based on climate science is futile, as evidenced by Governor Newsom’s failed attempt in 2022 to adopt a more aggressive GHG target for 2030 at 55% below 1990 levels.

EDF’s above-cited comment letter does not even mention any specific climate goal. It advocates for more ambitious allowance budgets based solely on allowance price projections and considerations of affordability; and yet it does not identify any specific price target or recommend any reforms to CARB’s Cap-and-Invest price controls.

What matters more than emission caps for environmental integrity is whether the regulations can achieve maximum technologically feasible GHG reductions within limitations of affordability. As long as additional GHG reductions are affordable, regulatory policy should incentivize further emission reductions.

California’s Cap-and-Trade regulations have, to an extent, motivated emission reductions beyond the cap requirement. During the pre-2020 compliance period, emission reductions were being driven by the price floor, not by the cap, resulting in attainment of the 2020 GHG target four years early. But if CARB had set its price floor within the range of initial price expectations, then the 2020 goal could have been achieved even sooner. Price volatility would have been moderated, and early action motivated by the price floor could have reduced the future costs of attaining California’s 2045 carbon-neutrality goal.

California’s climate policies are impeded not by market volatility and unpredictability, but rather by indecision, the inability of the political establishment to decide what price we are able and willing to pay to mitigate climate change. CARB should reform its Cap-and-Invest price controls, including the price floor and ceiling, based on foundational policy objectives and constraints rather than relying on the defunct Waxman-Markey bill and an obsolete social cost of carbon.

Ken Johnson is affiliated with the Climate Reality Project: Silicon Valley Chapter and is a writer on climate-policy topics.