With the introduction of Senate Bill SB 775 (California Global Warming Solutions Act of 2006: Market-based Compliance Mechanisms) into the California Senate on May 2, 2017, California is innovating on climate policy once again. Although it has a long journey to complete before becoming law, SB 775 is significant because it would completely revamp California’s cap and trade system once the current program ends in 2020. Under SB 775, the key features of California’s proposed new system are as follows:
- The cap and trade system would be completely overhauled with a new program commencing on January 1, 2021; no allowances and offsets from the current system would be transferred over.
- All allowances under the proposed new program would be auctioned, meaning that no allowances will be allocated for free. Further, no offsets will be permitted for use as a compliance mechanism.
- A price collar would be established in 2021, with the price floor starting at US $20 and a price ceiling of US $30 (the initial auction price would be set at US $30 per allowance). The price floor would rise at $5 per year plus inflation; while the price ceiling would rise at US $10 per year plus inflation. The proposed program is designed to operate in perpetuity, so in the absence of amendments to the program, the price ceiling could exceed US $300 by 2050.
- A broad revenue structure would be established to allocate revenue into three programs: (1) California Climate Dividend Program, which will rebate revenue on a per-capita basis; (2) public infrastructure investments and investments in disadvantaged communities; and (3) climate and clean energy research and development.
- The new cap-and-trade program will not link to any other jurisdiction until that jurisdiction has a minimum carbon price that is equal to or greater than California’s. Also, the Governor must be satisfied that the linkage will not adversely impact California dividends.
- The proposed cap-and-trade program would impose a border adjustment tax on imports based on their carbon intensity, which would be administered by a newly created Economic Competitiveness Assurance Program. The border adjustment tax would seek to ensure that in-state industry is not unduly impacted by California’s carbon pricing regime. In the event that a border adjustment tax is reduced or eliminated following a legal decision, SB 775 provides a safety net for California businesses in the event the border adjustment tax is reduced or eliminated following a legal challenge. In particular, free allowances, would be made available to eligible companies for the purpose of maintaining economic parity between producers of carbon intensive goods that are subject to the cap and trade system and those who produce or sell similar products that are not.
The introduction of SB 775 comes on the heels of Bill SB 584, which was introduced in February 2017 and calls for 100% of the state’s electricity to come from renewable sources by 2045. Bill SB 32, which was passed in 2016, establishes an ambitious emissions reduction target for 2030 – i.e. beyond the current emissions reduction target of returning to 1990 emission levels by 2020, SB 32 mandates a reduction of an additional 40% in emissions by 2030.
The passage of SB 775 in its current form will no doubt have implications for the existing cap and trade programs in Québec and Ontario. Since 2014, California’s cap and trade program has been linked to Québec’s emissions trading system and Ontario is expected to link to both California and Québec’s cap-and-trade programs in 2018. Since any jurisdiction looking to link with California’s program from post-2020 would first need to match the state’s level of carbon pricing, Québec and Ontario may have limited incentive to link to California from 2021, since California’s minimum carbon price in 2021 will already be close to or exceed the carbon pricing requirements of the Canadian federal government (starting in 2018, provinces and territories are expected to implement a carbon price of CAD $10, which will increase by $10 per year until it reaches CAD $50 in 2022). SB 775 is now undergoing review by the Committee on Environmental Quality, after which it will be sent to the state Senate and then on to the state Assembly, before it is sent back fro reconciliation. California Governor Jerry Brown has asked for reauthorization of the cap and trade program by July 2017.