10 January 2017

Pricing carbon: California’s unfinished climate priority

Danny CullenwardMichael Wara

Danny Cullenward

Danny Cullenward is a research associate with Near Zero and the Carnegie Institution for Science. 

Michael Wara

Michael Wara is an associate professor at Stanford Law School. 

At the close of their legislative session in August, California lawmakers passed one of the world’s most significant climate policies—SB 32, named after the state’s original climate law from a decade earlier, AB 32. The new bill added a single line to its predecessor, requiring the state to reduce its greenhouse gas emissions 40 percent below 1990 levels by 2030. With that single stroke, California began a new chapter in the story of its formidable climate leadership.

In order to bring the new goal within practical reach, California must renew its commitment to carbon pricing. But first, climate policy advocates need to build a broad coalition that benefits from the state’s plans for deep de-carbonization.

Whether in the form of a carbon fee or via an overhaul of the state’s carbon market, carbon pricing will be essential for encouraging technological innovation and copycat policies around the world. Yet due to the state’s idiosyncratic tax system, in which any new levy must first receive two-thirds approval from the legislature, carbon pricing requires supermajority support.

Backers of the new bill did not have a supermajority in 2016, but they might be able to form one if they appeal to a powerful emerging bloc, the environmental justice community. Because carbon pricing generates revenue that can protect low-income communities from the cost of energy transitions—or even help them benefit from tackling the climate problem—this would seem like a natural alliance. In fact, a progressive use of carbon pricing revenue may prove to be the key that unlocks the politics of deep climate mitigation, especially in a state where concerns about the environment and concerns about growing inequality are increasingly intertwined.

Admirable ambitions. California’s new carbon target is ambitious, even in light of progress to date. Its original climate law requires statewide emissions to return back to 1990 levels by the end of this decade, a goal the state is on track to meet. From there, the pace of emissions reductions must accelerate dramatically—to about 10 times the current rate—in order to reach the 2030 target.

California’s new law might seem bold, but in fact it reflects the pace of action required by the global climate crisis. Not only does it match the European Union’s pledge under the Paris Climate Agreement—a model commitment at the international level—but it is also designed to put the state in position to reach a deep de-carbonization target of 80 percent below 1990 levels by the year 2050, as expressed by a series of executive orders from Governors Arnold Schwarzenegger and Jerry Brown. In turn, the 2050 target is consistent with what wealthy economies like California will need to contribute to achieve the Paris goal of holding overall global warming to less than 2 degrees Celsius above pre-industrial temperatures.

Few governments have mustered the political will to develop long-term climate goals. Fewer still have followed through on their promises. Over some 15 years, however, leaders in the California legislature and multiple governors from both parties have made climate a priority, including with the new bill passed this fall. They deserve great credit for their accomplishments. And if California can deliver on its ambitious plans, the state’s success will show the path for others around the country and the world to follow at a time when climate leadership is desperately needed.

Yet setting a legally binding climate target is just an initial step because targets mean little without implementation strategies. Right now, the only legally viable strategy is to rely exclusively on traditional regulatory approaches. We are skeptical of the state’s ability to deliver using solely this approach, and pessimistic about the interest and ability of other governments to follow suit. Hence the need for a renewed commitment to carbon pricing—and new legislation to make it happen.

The case for carbon pricing. When lawmakers crafted their original climate bill, they provided authority for the state climate regulator, the California Air Resources Board, to develop a carbon market. Because the legislature was deeply split on the use of carbon trading, it provided this authority only through the end of this decade, which means the Board cannot extend its carbon market to implement the state’s new climate target. The Board takes the opposite view, arguing that existing law provides the necessary authority—but so far has been unwilling to explain its legal reasoning in public board meetings or regulatory documents.

It’s no secret that new legislation is required, yet thanks to an anti-tax initiative passed by voters after the first climate law, a two-thirds vote is now needed for any legislation that imposes any new charge on any taxpayer. Because carbon markets that auction pollution permits and carbon fees both impose these kinds of charges, a new bill that authorizes either would be subject to this voting requirement. This is one of the key reasons California’s new climate law was silent on the question of the Air Resources Board’s authority to price carbon in pursuit of the state’s 2030 target. Because the bill’s sponsors were not in a position to secure a supermajority last year, the question had to be deferred until after the election.

Without new authority to price carbon, the Board will be left to regulate its way to 2030. There are some stakeholders who believe this path is a good one—and indeed, regulation has been the dominant strategy for reaching the target set for the end of this decade. But the idea that this approach will deliver for the much deeper target to come strikes us as misguided. Carbon pricing is superior to a pure regulatory strategy for three key reasons.

First, regulations will be successful only if the Air Resources Board accurately predicts the future of all major economic sectors and energy technologies. Unfortunately, decades of research in energy economics shows that our ability to predict the future of these systems is woefully inadequate. As a telling example, the projections the Board made at the launch of the first climate law nearly ten years ago bear little resemblance to the world in which we live because of the great recession, continued progress in energy efficiency, and unexpected cost declines in renewable energy technologies and natural gas. But luck isn’t a substitute for accuracy, especially when reaching for deeper targets. A well-designed carbon pricing policy doesn’t require the same level of regulatory foresight, relying instead on market forces to deliver necessary reductions.

Second, regulations don’t scale easily. Perhaps the most important reason for state governments like California’s to pursue climate policy is to encourage other governments to follow suit, but no other subnational government has an environmental regulatory agency with the staff, resources, or knowledge found at the Air Resources Board. (Only the Environmental Protection Agency is comparable, but the election of Donald Trump has rendered climate policy dead on arrival there.) California shouldn’t abandon successful regulations, but it shouldn’t presume it can export them either. The more complex the Golden State’s regulatory approach, the less portable it will be to other jurisdictions.

Third, carbon pricing will be needed to spur broad and rapid innovation. We simply don’t have all of the technologies necessary to simultaneously achieve deep de-carbonization and economic prosperity. While there are many promising ideas for creating low-carbon jobs and wealth, it is extremely difficult to bring them to market if carbon-based incumbents don’t pay for their climate pollution. Regulations can help close that gap and lead to innovation, but only in the sectors that are regulated. The risks of a regulatory approach are even greater because many of the most promising climate strategies would redefine entire sectors, requiring careful and ongoing oversight—such as with vehicle electrification, which blurs the line between the utility and transportation sectors.

In short, the need for innovation across all sectors of the economy suggests that a piecemeal regulatory approach won’t create the private incentives necessary for deep climate mitigation. Only broad carbon pricing can pick up the slack.

Shifting politics. Legal constraints aren’t the only issue in state climate policy, of course. Politics matters, too, and on that count one of the most important developments this year was the re-emergence of the environmental justice community as a powerful new voice in the California climate policy debate.

This bloc signaled its arrival by pushing another bill, AB 197. Environmental justice advocates successfully tied its passage to the new climate legislation, such that only if both bills passed would either take effect. Both did.

The second new law requires the Air Resources Board to prioritize “direct reductions” of climate pollution—a clear message that its backers are dissatisfied with the carbon market, where large industrial emitters can purchase offset credits and other tradable compliance instruments without reducing their own air pollution (non-climate co-pollutants being of particular concern to the predominantly low-income and minority communities who live near California’s refineries, ports, and other industrial facilities). The second bill also set up a legislative committee charged with overseeing the Board’s climate policy programs. Since state climate policy began in 2006, the regulator has had near-exclusive control over the agenda; between the new oversight committee and the need for new legislation to enable carbon pricing, the balance of power is shifting back toward the legislature.

Moreover, the environmental justice community’s opposition to carbon markets isn’t limited to their new law. The Air Resources Board has an environmental justice advisory committee, whose recommendations on the original implementation of the 2006 bill went largely unheeded. The Board reconstituted the committee to provide advice on the agency’s 2030 implementation strategy, in which the Board made clear it prefers to maintain its carbon market. Instead of supporting the agency’s preferences, however, members of the advisory committee testified in opposition to the Board’s plans while allied community groups organized a coordinated protest.

The recent positions taken by environmental justice advocates illustrate an important split with traditional environmental organizations in California, whose power base is concentrated in wealthy coastal communities and whose advocacy generally supports the positions of the Air Resources Board. In contrast, environmental justice communities are concentrated in low-income urban neighborhoods and rural agricultural areas in the state’s Central Valley. Getting to two-thirds support for a new carbon pricing initiative requires a broader coalition than can be assembled from the usual coastal districts. As a result, it will be critical for policy makers and climate advocates to better accommodate the concerns of the environmental justice community in order to maintain a price on carbon in California.

A social justice solution. We believe the best way to bridge this divide is to rebate a substantial portion of the revenue collected under a carbon pricing program back to California residents—ideally in a direct and tangible way that generates good will among new constituencies, not just actuarial tables promising a progressive outcome. Making carbon revenue benefits obvious to everyday people holds enormous potential, but will work only if a broad coalition of non-traditional organizations recognizes the benefits and works to support a bill.

There is no greater illustration of this point than the ill-fated ballot initiative for a revenue-neutral carbon tax in Washington State last fall, which received just 41 percent support. As David Roberts writes at Vox, the battle over climate policy in Washington reflects a growing divide within the progressive community. There is no simple policy solution to avoid a similar impasse in California. Rather, the division within the environmental movement over carbon pricing in Washington reflected the failure of two coalitions to find common ground on revenue use. If those divisions can’t be overcome in California, there is no reason to expect a different result, whatever form carbon pricing takes.

While that challenge may seem daunting, California’s success on carbon pricing could show the way forward for broader political coalitions to emerge on climate. We believe that revenue use will be the key issue to navigate in carbon pricing, especially since the carbon prices necessary to achieve California’s 2030 target are likely to be much higher than they are today. Hiding those costs in regulatory programs can work for modest efforts, but to begin deep de-carbonization requires the environmental movement to prioritize social equity. Harnessing markets has the added advantage of increasing the pace of innovation, too.

Making sure the climate transition benefits low-income neighborhoods and communities of color isn’t just the right way to pursue climate policy. In California, where policies to price carbon require a two-thirds vote before becoming law, it may turn out to be the only way.