California’s Controversial Cap-and-Trade Initiative

Wednesday, September 19, 2012 by Lev Gabrilovich

Five years ago, California passed Assembly Bill 32 (“AB 32”), the Global Warming Solutions Act. AB 32 requires the California Air Resources Board (“CARB”) to establish a regulatory structure to monitor greenhouse gasses in California, as well as set emission targets. CARB must implement “the maximum technologically feasible and cost-effective greenhouse gas emission reductions.” The regulations allow for CARB to implement market-based solutions, including a cap-and-trade program for green house gas emissions. According to the U.S. Environmental Protection Agency, cap-and-trade programs involve the government setting a general emissions limit, with limited authorizations to emit pollution. These authorizations can then be banked or sold among polluters for maximum efficient use. To implement the program, CARB plans to introduce auction systems. CARB would hold auctions that determine the price of permits, which functions like a direct tax on participants.

Studies indicate that California’s program will adversely impact low-income communities

Cap-and-trade programs are already controversial, but the California initiative is receiving criticism due to reports that the program, particularly the auction system, will disproportionately impact California’s low-income communities. A report conducted for the AB 32 Implementation Group has identified several sources of disproportionate impact on low-income communities. The report analyzes information from the Economic and Allocation Advisory Committee (“EEAC”), which stated that the pseudo-tax resulting from the auctions would lead to increased energy prices, impacting low-income families. According to the report, the costs of reducing carbon dioxide by 15 percent will cost the low-income families 3.34 percent of their income, while higher income families only lose 1.7 percent of their income. The EAAC suggested mitigating this impact by establishing an energy subsidy program for low-income families. However, the Implementation Group report determined that subsidy programs would negate part of the incentive to decrease emissions by reducing the energy price increases.

The fact that California will be the leader in this field may also result in harm to low-income families, as the EAAC determined that cap-and-trade would make California companies less competitive than the companies of her sister states, thereby weakening California’s economy. On the other hand, other research has concluded that the costs of cap-and-trade would negatively impact wealthier households, while leaving lower-income households unaffected. An MIT study, which examined cap-and-trade systems generally, found that households earning less than $10,000 a year could enjoy a 1.5 percent increase in income. Thus, a disproportionate impact on low-income families is far from certain.

The possible effect of cap-and-trade is not merely an economic problem, but a legal one as well. Regulations attached to AB 32 provide that the state must ensure that “activities undertaken to comply with the regulations do not disproportionately impact low-income communities.” If the cap-and-trade system has such an impact, it may not be a feasible portion of AB 32.

Compliance with emissions requirements will begin in 2013, making California an exciting state to watch over the next few years.