How current programs can inform future cap-and-trade investments

OPINION – Cap-and-trade extension discussions are heating up in the Legislature, with Governor Newsom proposing to extend the program out to 2045 in the May Revision to the state budget.

The Governor’s proposal includes a ‘clean’ reauthorization – that is, without changes to program design, such as allowance allocations or the use of offsets. It also earmarks key expenditures from cap-and-trade auction proceeds – known as the Greenhouse Gas Reduction Fund (“GGRF”) – including retaining high-speed rail with an ongoing $1 billion per year, as well as backfilling CAL FIRE’s wildfire budget in the General Fund with $1.5 billion per year.

The Governor’s proposal elicited mixed responses. Environmental groups view his proposal as weak on air, water and public health protections. Transit organizations wanted to see a greater commitment to transit programs. Labor endorsed the proposal, given its commitment to high-speed rail.

But these reactions are based upon these groups’ own interests. Is there some kind of objective way we could analyze the effectiveness of the Governor’s – and any – GGRF proposals?

The answer is yes: the state has multiple years of data on the climate- and cost-effectiveness of the roughly 100 GGRF programs. Although climate and cost may not be the only metrics stakeholders care about, it is a clear place to start. (It is called the “Greenhouse Gas Reduction Fund”, after all).

And what the data shows is hugely consequential. For example, over 50% of programs either achieve zero emissions reductions, or cost greater than $1,000 to reduce one ton of carbon. By comparison, the most recent cap-and-trade auction clearing price was $26/ton. The main affordable housing and sustainable communities program, which has already implemented over $2 billion in projects and has billions more in unspent funds, costs over $500/ton. High-speed rail could feasibly cost in the hundreds of thousands of dollars per ton in the 2030s, which would be far and away the least cost-effective program in the portfolio, assuming a consistent schedule of GGRF allocations.

We can also analyze whether current programs are consistent with the state’s main strategy for achieving net-zero emissions by 2045. Here, too, the results provide reason for pause: none of the main GGRF programs, including high-speed rail, affordable housing and sustainable communities, or transit, are identified as priority investments. In fact, high-speed rail is not mentioned in the plan at all.

What is an alternative? If policymakers are interested in aligning the GGRF portfolio with climate and energy affordability goals, investments should be made in three key areas: clean energy infrastructure, such as electrical transmission; climate technology innovation, such as industrial decarbonization and carbon removal; and climate resilience, notably wildfire prevention. Low-cost loans for transmission presents a particularly important opportunity to also drive affordability benefits to ratepayers.

This ‘affordable net-zero’ investment framework is aligned with the myriad of state plans and policies that have emerged since 2014, which is when the current main GGRF allocations were last set. At that point, California did not even have a 2030 climate goal, let alone a net-zero goal. 100% clean energy was not a target. The Paris Agreement wasn’t even signed.

Some cap-and-trade advocates argue that the cap alone can be responsible for emissions reductions, while the expenditure side is less important for climate goals. But this massively – and erroneously – overstates what can be achieved by a steadily increasing carbon price in only 20 years.

It is vital that the state extend the cap-and-trade program. The Governor, Speaker and Pro Tem showed tremendous leadership when they stood up to the President’s attacks to defend the state’s climate policies. But extending the program without meaningfully reviewing the expenditure side would be a significant missed opportunity and put the state’s climate goals in serious jeopardy.

If change is not achieved to the GGRF, policymakers may as well also consider a name change to the fund (similar to how the Governor has proposed “cap-and-invest” instead of cap-and-trade) – because it certainly won’t be delivering emissions reductions.

Sam Uden is the Co-Founder and Managing Director of Net-Zero California.