California Losing $3 Billion a Year Over Cap and Trade Auctions

California’s Cap and Trade program experienced yet another setback on Monday when a new Clean and Prosperous California report found that the state lost $3 billion in revenue over the past year – Or roughly about 1/4th of California’s current budget deficit.

As the California Globe has previously explained:

“California’s cap-and-trade program places a ‘cap’ on aggregate greenhouse gas emissions from businesses and utilities deemed “polluters” by the California Air Resources Board, which the CARB says are responsible for most of the state’s greenhouse gas emissions.

“The California Air Resources Board (CARB) has taken a great deal of liberty, particularly with its interpretation of AB 32, California’s Global Warming Solutions Act of 2006. The CARB devised the cap-and-trade system whereby it holds a quarterly auction program requiring selected California employers to bid significant amounts of money for the privilege of continuing to pollute — or be faced with closing their doors.

“The Air Resources Board issues carbon allowances, and businesses are forced to buy or sell these in the open market. Several other countries including Spain and Australia have already acknowledged carbon taxing does not work, but California’s Air Resources Board, Democrats, and Gavin Newsom stubbornly continue on with carbon taxing – not because they are true believers – because it’s a revenue-generating tax.”

However, everything depends on the auction itself, with the state banking on companies needing the credits badly enough to pay a premium for them. In past years, the state has actually turned a profit with these auctions offset with business revenue. Ten years ago, in 2015, the state made $1.49 billion as a result with Cap and Trade. Since Cap and Trade began, greenhouse emissions have gone down 20%, but with the price tag of $33 billion in Cap and Trade funds, plus whatever was lost in lost business taxation.

With new regulations, struggles since COVID, a shakeup of traditional polluting businesses and other factors, Cap and Trade has become a worse and worse program for California in recent years. The program itself has also been targeted by Republican lawmakers, with the biggest one this year being President Donald Trump. And, as the new report on Monday found, this has taken a major toll on the state.

Cap and Trade failure

The allowance prices of permits have gone down from $42 per metric ton of carbon dioxide emitted to only $26 per metric ton, causing auction prices to tank as well. The last auction in May saw 1 nearly $1 billion drop in auction prices from the previous year, with the state losing between $600 million and $1 billion in revenue from each quarterly cap-and-trade auction. The next auction, in August, is expected to see a similar drop.

While there are solutions on the table, like limiting the number of permits to force companies to buy more credits at auction and expanding the program into the next decade, it would take time for CARB to get them all approved – assuming they could with multiple lobbying groups likely to fight it in Sacramento and through lawsuits. So, for now, Cap and Trade is costing the state dearly.

“California gave away up to nearly $3 billion in revenues from its cap-and-trade program over the last year. This lost revenue, equal to roughly one-quarter of California’s budget deficit, would have otherwise been directly invested into communities and used to lower utility bills for ratepayers. Weak revenue results stem from tumbling allowance prices that have fallen from an all-time high of nearly $42 to near-historic lows of $26 caused by uncertainty over legislative extension and delays in regulatory rulemaking,” said Clean and Prosperous California Director Clayton Munning in their report.

“Restoring cap-and-trade auction revenue requires two actions in order: (1) the legislature acting as soon as possible to extend the cap-and-trade program beyond 2030, and (2) the California Air Resources Board (CARB) resuming its rulemaking immediately thereafter and delivering anticipated allowance supply cuts. We expect California will continue losing between around $600 million and $1 billion in revenue from each quarterly auction until the California legislature reauthorizes the cap-and-trade program. Legislative reauthorization would position the cap-and-trade program to provide a reliable source of funding for California during uncertain times.”

The state is expected to lose between $600 million and $1 billion more at the next auction in August. Neither the Trump administration’s attempts at halting Cap and Trade nor are CARB’s possible permit reductions are expected to make an impact by then, but could prove effective in the auctions that follow.