Carbon Pricing in California

Spencer Rogers
December 20, 2016

Submitted as coursework for PH240, Stanford University, Fall 2016


Fig. 1: Projected carbon dioxide emissions reductions by sector in California. (Source: S. Rogers, after the Center for Climate and Energy Solutions. [1])

Cap-and-trade is policy tool that aims to reduce greenhouse gas emissions and establish a set limit on those emissions. The implementer of the policy allocates or auctions off tradable emissions allowances to emitters. The allowances are usually the equivalent to one metric ton of carbon dioxide or carbon dioxide equivalent and the number of allowances an emitter has translates to how much it can emit during a given period of time. [1] Emitters have the option to either use or trade their allowances with one another depending on their specific needs.

Implementation in California

On September 27, 2006, Governor Arnold Schwarzenegger signed into law the Global Warming Solution Act, which set in motion a comprehensive program to reduce greenhouse gas emissions. The bill allowed California to adopt a market-based solution to cut greenhouse gases, and in 2013, the state debuted its cap-and-trade program. [2]

California is the first state in the nation to implement a state and economy wide cap-and-trade program, and as the world's 8th largest economy, the program is the second largest carbon-market in the world after the European Union. [2]

Early Outlook

The first five allowance auctions occurred in 2013 and all allowances usable for compliance were sold off. The floor price or the minimum bid for the first auction was $10 and, after the first year, the allowance prices stabilized at around $11, which marked a much lower price than previously expected and suggests that the program might meet its 2020 goals at a much lower cost than expected. The state auction proceeds totaled $553 million after the first year, and California law stipulates that these proceeds must be invested further into reducing greenhouse gas emissions.

Further Expansion

In January 2014, California linked its cap-and-trade program with Quebec's to create an even larger carbon market. The first join auction occurred in November 2014 and, in 2015, the joint emission trading system expanded its emission coverage to include transport fuel. This expansion marks an increase from 35% to 85% of all green house gas emissions within the market. [3] In April 2015, Ontario announced that it would seek to join California and Quebec's emission trading system, further expanding the carbon market. [3]

Future Outlook

California is currently on track to meet its 2020 goals of reducing emissions to 1990 levels. Fig. 1 illustrates the projected reductions in carbon dioxide emissions by sector. Each year, the program will reduce the number of allowances and the price of these allowances will rise. With the original floor price set at $10 in 2012, subsequent allowance prices by 5% each year plus the rate of inflation. California has announced that it intends to reduce greenhouse gas emissions by 40 percent with respect to 1990 emissions by 2030. [2]

© Spencer Rogers. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] "California Cap-And-Trade Program Summary," Center for Climate and Energy Solutions, January 2014.

[2] K. Hsia-Kiung and E. Reyna, "Carbon Market California," Environmental Defense Fund, 2015.

[3] A. Kossoy et al., "State and Trends of Carbon Pricing," World Bank, September 2015.