Designing the Allocation Process for California’s Greenhouse Gas Emissions Trading Program: The Multi-Billion Dollar Question

Next 10 commissioned a set of five research papers from leading academic experts to address the multibillion dollar issue of how California should distribute greenhouse gas (GHG) allowances and the resulting revenue. Key findings from this expert research are summarized in Designing the Allocation Process for California’s Greenhouse Gas Emissions Trading Program: The Multi-Billion Dollar Question and links to the five reports are available on the Additional Resources tab.

These important design issues will decide by whom and how tens of billions of dollars will be used, both of which will greatly influence the market incentives operating in California’s greenhouse gas emissions trading program. The projected value of emission permits in 2012, the first year of California’s cap-and-trade program, will be $2.5 to $7.5 billion. By 2020, the value will rise to an estimated $7.3 to $21.9 billion. One important takeaway from our research is that even in the most vulnerable business sectors—those that are very energy-intensive or trade-exposed—the impacts of a cap-and-trade program are quite small even without free allowances.

In addition to this body of research Next 10 commissioned a poll from the Field Research Corporation that was completed November 11-23, 2010 among a random sample of 493 registered voters.

"Ironically, the increased attention generated by Proposition 23, which sought to suspend AB 32 and was defeated by voters at the polls in November by a 62% to 38% margin, has had the effect of strengthening support for the law." -Mark DiCamillo, Senior Vice President of Field Research Corporation

The top findings of the Field Research Corporation poll, completed November 11-23, 2010, among a random sample of 493 registered voters, are:

  • 66 percent of California voters favor strongly (44 percent) or somewhat (22 percent) the 2006 law to reduce emissions of greenhouse gases that cause global warming (AB 32), up from 58 percent who backed the law when Field Research last polled on this topic in March.
  • 64 percent of California voters favor strongly (34 percent) or somewhat (30 percent) creating an emissions trading program wherein businesses would be required to obtain tradable permits to continue emitting greenhouse gas emissions.
  • Just over half of California voters (52 percent) favor distributing these permits for free rather than requiring businesses to purchase them (35 percent).
  • If the state did require businesses to purchase the permits, 54 percent of California voters would favor using the resulting revenue to reduce cuts to state services, as opposed to returning the money to residents (39 percent).
  • 73 percent of California voters agree strongly or somewhat that California can reduce greenhouse gases that contribute to global warming and expand jobs and economic prosperity at the same time. This is up from 69 percent who agreed with this statement in March.

Findings of five research papers from leading academic experts are highlighted in Next 10's summary report entitled Designing the Allocation Process for California's Greenhouse Gas Emissions Trading Program: The Multi-Billion Dollar Question and include:

Macroeconomic Impacts

  • The impacts of an AB 32 cap-and-trade program on Gross State Product (the value of goods and services produced in California) will be very small. Each study finds that these impacts might range from very slightly negative to slightly positive depending on assumptions and policy scenario designs. (Roland-Holst, Rose et al)
  • Leakage of business activity from California as a result of AB 32 is likely to be small. Any leakage will stem from the rather minor effect of the bill on the costs of production in most 3 competitive sectors. It is apparent that AB 32 adjustment costs do not outweigh the benefits of market proximity, network synergies, etc., currently enjoyed by firms now located in California. (Roland-Holst, Rose et al)
  • Changes in retail electricity prices resulting from AB 32 and the emissions trading program will be very small. (Roland-Holst, Rose et al)
  • Economic growth as well as income distribution impacts range from slightly negative to positive depending on the extent to which the opportunity cost of free allowances will be passed to the consumer or not. (The models examine extreme cases: the structure of Roland-Holst's model enables a significant amount of carbon price pass-through; Rose et al assumes none of it will be passed.) If costs are not passed along, then there is estimated to be a net positive impact of free allocations on consumers.
  • According to one paper, 100 percent auction scenarios with an annual energy efficiency improvement of one percent produce the best jobs results. 115,000 jobs by the year 2020 result from the 100 percent auction scenario in which revenues are returned to Californians through dividends, while 109,000 jobs are produced by 2020 in the 100 percent auction scenario in which resulting revenues are returned to Californians through reductions in personal tax rates. (Roland-Holst)

Impacts on Industry

  • Even if industrial producers failed to respond to incentives to use cleaner technologies, and they continued to use the same energy mix after the introduction of an emissions trading program, the impacts to California’s energy intensive and trade exposed industrial sectors would be small. (Morgenstern and Moore)
  • Under the formula embodied in federal legislation that passed the House of Representatives in 2009 (ACES), the impacts average 0.43 percent of the value of production for the most energy intensive industries facing the greatest international competition. Given CARB’s stated intention to be more generous to these sectors than under the federal proposal, the anticipated impacts should be even smaller and some sectors could well enjoy higher profits as a result. (Morgenstern and Moore)

Priorities for Revenue Investment

  • A clear priority is for government investment to facilitate the capture of low cost greenhouse gas emission reductions that the emissions trading program alone would not achieve. This enhances cost effectiveness by overcoming market barriers inhibiting the transition to low carbon economy technologies that exist even after a price on carbon is established. (Farbes and Kammen)
  • In light of the above, and AB 32’s mandate to ensure fairness in implementation and environmental justice in particular and the need for California to adapt to climate change to the extent some warming is inevitable, research identifies a number of priority investments: 1) 4 Research, development and demonstration funding to speed the invention and commercialization of new advanced technologies, 2) incentives to bolster the diffusion of existing improved technologies, 3) investments in communities burdened by high pollution levels and low income, to capture public health benefits there and to enhance the program’s fairness, and 4) adaptation to climate change recognizing that some global warming is inevitable. (Farbes and Kammen)