Cap-and-Trade Extension: Issues for Legislative Oversight

Cap-and-Trade Extension: Issues for Legislative Oversight MAC TAYLOR LEGISLATIVE ANALYST DECEMBER 2017 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Cap-and-Trade Program Recently Extended From 2020 to 2030. In adopting Chapter 135 of 2017 (AB 398, E. Garcia), the Legislature extended the state’s cap-and-trade program from 2020 to 2030. Cap-and-trade is a key policy to help ensure the state achieves its goal of reducing greenhouse gas (GHG) emissions to 40 percent below 1990 levels by 2030. The program establishes a “cap” on emissions by issuing a limited number of permits to emit, also known as allowances. Allowing businesses to buy and sell (“trade”) allowances results in a market price, which creates a financial incentive for businesses and household to undertake emission reduction activities that are less costly than the allowance price. Key Implementation Decisions Could Have Significant Effects on Program Outcomes. Although AB 398 provides direction to the California Air Resources Board (CARB) regarding certain design features of the cap-and-trade program, the bill gives CARB significant discretion regarding how to implement many of these features. These implementation decisions are often complex and can have significant effects on key program outcomes, such as GHG reductions and program costs. To help the Legislature ensure CARB is implementing AB 398 in a way that is consistent with legislative goals and priorities, we identify the following key issues for future oversight: • Setting Post-2020 Caps and Banking Rules to Ensure State Meets Its GHG Targets. The Legislature will want to evaluate CARB’s assessment of the potential for a large number of banked allowances issued in the early years of the program to be carried forward and used in the later years of the program, and how this could affect the likelihood of the state meeting its 2030 GHG target. If it is determined that a large number of banked allowances creates a significant risk of not meeting the 2030 target, the Legislature will want to evaluate different options to address the issue, such as reducing the number of allowances offered at future auctions. • Setting Hard Price Ceiling at Level That Balances Emissions and Costs. The Legislature will want to evaluate how the level of CARB’s proposed price ceiling balances trade-offs, such as interests in containing costs versus certainty that targeted emissions levels will be achieved. • Setting Price Containment Points to Limit Price Spikes. The Legislature will want to evaluate whether the number of allowances in each containment point and the level of each price containment point are consistent with legislative interest in slowing price increases, while also limiting emissions. • Implementing New Offset Limits Consistent With Legislative Intent. The Legislature will want to ensure CARB identifies projects with direct environmental benefits and limits the use of projects without direct environmental benefits in ways that are consistent with legislative intent. • Determining Industry Assistance Factors (IAFs) Through 2020. The Legislature will want to evaluate whether CARB direction to maintain 100 percent IAFs through 2020 balances leakage risk and incentives for GHG-reductions in a way that is consistent with legislative priorities. Clarifying the Role of Market Advisory Committee Could Enhance Information in Future Reports. Assembly Bill 398 includes a variety of new reporting requirements meant to enhance oversight and accountability. This includes establishing an Independent Emissions Market Advisory Committee and requiring the committee to report annually on the environmental and economic performance of www.lao.ca.gov 1 analysis full gutter AN LAO REPORT cap-and-trade and other relevant climate policies. In our view, the committee has the potential to provide valuable information that enhances legislative oversight and improves future policy decisions. However, there are areas where the Legislature might want to consider clarifying or refining the direction given to the committee. For example, the Legislature could clarify (1) which climate policies are within the committee’s jurisdiction, (2) whether the committee should advise on future program design issues and/ or evaluate past program performance, and (3) specific outcomes it would like the committee to evaluate. More specific direction could increase the likelihood that committee reports will include the type of information that the Legislature finds most valuable. Cap-and-Trade Revenue Could Vary By Billions of Dollars Annually. Assembly Bill 398 also extended the period in which the state will receive revenue from cap-and-trade auctions. The amount that will be generated in future years is highly uncertain, largely because a wide variety of factors could affect prices, including (1) future “business-as-usual” emissions, which depend on economic conditions and technological changes; (2) the stringency and effectiveness of other GHG reduction policies; and (3) cap-and-trade program design decisions, such as the ones discussed in this report. We examine state revenue under two different assumptions about future allowance prices—a “low price” scenario and a “high price” scenario. Under these two scenarios, revenues would range from $2 billion to $4 billion in 2018 and from $2 billion to about $7 billion in 2030. Although these two scenarios provide a plausible range of future revenues, there are alternative scenarios where revenue could be higher or lower. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION The cap-and-trade program is one of the state’s key of the program to 2030, (2) identify key administrative policies intended to reduce statewide greenhouse gas implementation decisions that could affect program (GHG) emissions. Recently, the Legislature extended outcomes and the need for legislative oversight, the state’s cap-and-trade program from 2020 to 2030 (3) identify potential opportunities to increase the with the passage of Chapter 135 of 2017 (AB 398, effectiveness of a new advisory committee created by E. Garcia). In this report, we (1) provide background AB 398, and (4) describe potential state cap-and-trade information on cap-and-trade and the recent extension revenue scenarios through 2030. BACKGROUND AB 32 Authorized Cap-and-Trade allowances, and each allowance is essentially a permit to emit one ton of carbon dioxide equivalent. (Please Through 2020 see the Appendix for a more detailed definition of an State Law Establishes 2020 and 2030 GHG allowance and other key cap-and-trade terms used in Limits. The Global Warming Solutions Act of 2006 this report.) The annual caps—or number of allowances (Chapter 488 [AB 32, Núñez/Pavley]) established the issued each year—decline over time, from 395 million goal of limiting GHG emissions statewide to 1990 levels allowances in 2015 to 334 million allowances in 2020. by 2020. Subsequently, Chapter 249 of 2016 (SB 32, Entities can also “trade” (buy and sell on the open Pavley) established an additional GHG target of market) the allowances in order to obtain enough to reducing emissions by at least 40 percent below cover their total emissions. Businesses that are covered 1990 levels by 2030. The California Air Resources by the regulation can comply in three ways: (1) reduce Board (CARB) is required to develop a Scoping Plan, emissions, (2) obtain allowances to cover emissions, which identifies the mix of policies that will be used and/or (3) obtain “offsets” to cover emissions. Offsets to achieve the emission targets, and update the plan are alternative compliance instruments—similar to periodically. Prior Scoping Plans included a wide variety allowances—that are generated by undertaking certified of programs, including a low carbon fuel standard GHG emission reduction projects from sources that (LCFS) intended to reduce the carbon intensity of are not subject to the state’s cap-and-trade program transportation fuels, energy efficiency programs, and (uncapped sources), such as forestry projects that the 33 percent renewable portfolio standard (RPS) reduce GHGs. for retail electricity sales. One policy that is used to From a GHG emissions perspective, the primary help ensure the state meets its emissions goals is advantage of a cap-and-trade regulation is that total cap-and-trade. Assembly Bill 32 authorizes CARB GHG emissions from the capped sector do not exceed to implement a market-based mechanism, such as the number of allowances issued. Some entities cap-and-trade, through 2020. However, prior to the must reduce their emissions if the total number of passage of AB 398, CARB did not have the authority to allowances (and offsets) available is less than the implement cap-and-trade beyond 2020. number of emissions that would otherwise occur. From Cap-and-Trade Designed to Limit Emissions at an economic perspective, the primary advantage of a Lowest Cost. The cap-and-trade regulation places a cap-and-trade program is that the market sets a price “cap” on aggregate GHG emissions from large GHG for GHG emissions, which creates a financial incentive emitters, such as large industrial facilities, electricity for businesses and households to implement the least generators and importers, and transportation fuel costly emission reduction activities. In theory, the suppliers. Capped sources of emissions are responsible market price will adjust to reflect the cost of reducing for roughly 80 percent of the state’s GHGs. To implement the last ton needed to ensure emissions remain under the program, CARB issues a limited number of the cap. This is the price that provides an incentive www.lao.ca.gov 3 analysis full gutter AN LAO REPORT to businesses and households that is high enough to AB 398 Extends Cap-and-Trade encourage enough emission reductions to stay under Through 2030 the cap, but no higher than what is needed. (For more Assembly Bill 398 extends CARB’s authority to details on how cap-and-trade works, see our February operate cap-and-trade from 2020 to 2030 and provides 2017 report The 2017-18 Budget: Cap-and-Trade.) additional direction regarding certain design features of Some Allowances Auctioned, Some Given Away the post-2020 program. It also includes new reporting for Free. About half of allowances are allocated for and oversight requirements. We summarize these free to certain industries, and most of the remaining changes below. (As discussed in the box on page 7, allowances are auctioned by the state. Of the allowances AB 398 and related legislation make other significant given away for free, most are given to utilities and natural changes to climate change and air quality polices.) gas suppliers. CARB also allocates free allowances Provides Direction for Certain Post-2020 to certain energy-intensive trade-exposed industries Cap-and-Trade Design Features. Assembly based on how much of their goods (not GHG emissions) Bill 32 gave CARB almost complete discretion they produce in California. This strategy, known as over how to design the cap-and-trade program. In “industry assistance,” is intended to minimize the extent contrast, AB 398 provides more specific legislative to which emissions are shifted out of state because direction about certain design features of the companies move their production of goods out of post-2020 program, such as the price ceiling and California in response to higher costs associated with the offsets. cap-and-trade regulation. This type of emissions shifting is referred to as “leakage.” CARB adopted amendments to the cap-and-trade regulation a few weeks after the Legislature passed The allowances offered at auctions are sold for a AB 398. However, restrictions imposed by the state minimum price—set at about $14 in 2017—which regulatory process prevented CARB from adjusting the increases annually at 5 percent plus inflation. A small regulation to incorporate most of the AB 398 changes. percentage of allowances are also placed in a special As a result, CARB will have to undertake a new account—called the Allowance Price Containment rulemaking process to amend the regulation to comply Reserve (APCR)—and made available at higher with AB 398. Figure 1 summarizes the major areas predetermined prices. These predetermined prices are of direction in AB 398 and how they compare to the sometimes called a “soft” price ceiling. The APCR is current cap-and-trade regulation, as amended this past intended to help moderate potential spikes in allowance summer by CARB. prices by increasing the supply of allowances available if prices increase to a certain amount. Adds New Reporting and Oversight Requirements. Assembly Bill 398 adds several new State Revenue Used to Facilitate GHG Reductions. reporting and oversight requirements, as summarized The state has collected a total of about $6.5 billion in in Figure 2 (see page 6). In most cases, existing cap-and-trade auction revenue from 2012 through entities—such as CARB and our office—are required 2017. Money generated from the sale of allowances to report on certain topics. Assembly Bill 398 also is deposited in the Greenhouse Gas Reduction Fund creates a new Independent Emissions Market Advisory (GGRF). To date, the revenues have generally been used Committee (Market Advisory Committee), located to fund projects intended to reduce GHGs. within the California Environmental Protection Agency. The committee is composed of at least five experts on emissions trading market design—including three appointed by the Governor, one by the Senate Committee on Rules, and one by the Speaker of the Assembly. It will also include a representative from our office. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Figure 1 Major Differences Between Current CARB Cap-and-Trade Regulation and AB 398a AB 398 Extension Design Feature Current Regulation (2021 Through 2030) Setting Post-2020 Emissions Caps Establishes the number of allowances When setting post-2020 caps, directs issued each year through 2030. CARB to evaluate and address concerns related to a large number of banked allowances. Banking No expiration date for allowances; Directs CARB to adopt banking rules limits on the number of allowances that “discourage speculation, avoid an entity can hold at a time. financial windfalls, and consider impact on complying entities and market volatility.” Price Ceiling “Soft” price ceiling of about $60 Directs CARB to establish “hard” per allowance in 2017, increasing price ceiling and consider various gradually in future years. factors when setting the level of ceiling. Price Containment Points None. Directs CARB to establish two price containment points (also known as speed bumps) between the price floor and the price ceiling. Offset Limits Maximum of 8 percent of a covered Maximum of 4 percent in 2021-2025 entity’s emissions. and 6 percent in 2026-2030, with no more than half from projects that do not provide direct environmental benefits in California. Industry Assistance Different IAFs for high- (100 percent), 100 percent IAFs from 2021 through medium- (75 percent) and low- 2030. (50 percent) risk industries from 2018 through 2020; not specified from 2021 through 2030. a Chapter 135 of 2017 (AB 398, E. Garcia). CARB = California Air Resources Board and IAF = industry assistance factor. KEY IMPLEMENTATION DECISIONS COULD AFFECT PROGRAM OUTCOMES A variety of factors will affect future cap-and-trade cap-and-trade implementation decisions—such as outcomes, including the key outcomes of GHG the overall supply of allowances and how they are emission reductions and the costs of reducing distributed—could have significant effects on program emissions. Reducing GHG emissions is the primary outcomes. For these decisions, the Legislature will want goal of the program, and the costs of GHG reductions to ensure CARB is implementing the program in a way will ultimately be borne by California households and that is consistent with legislative goals and priorities. businesses. Many of the major factors that could At the time this report was prepared, CARB staff had affect these outcomes—such as future technological already begun public workshops to discuss some of changes, broader economic conditions, and the the changes to the post-2020 cap-and-trade regulation presence of other GHG regulations—will largely occur required by AB 398, as well as other potential changes for reasons that are unrelated to the design of the identified by the board. Based on an initial timeline state’s cap-and-trade program. However, some key presented at a public workshop in October 2017, www.lao.ca.gov 5 analysis full gutter AN LAO REPORT Figure 2 Key AB 398a Reporting Requirements Subject of Report Responsible Entity Date and Frequency Environmental and economic Market Advisory Committee. At least annually until 2031. performance of cap-and-trade regulation and other relevant climate policies. Economic impacts and benefits of Legislative Analyst’s Office. Annually until 2031. state greenhouse gas (GHG) limits. Need for increased workforce California Workforce Development By beginning of 2019. development activities and funding Board, in consultation with to help transition to economic and California Air Resources Board labor-market changes related to (CARB). state GHG targets. Progress toward meeting GHG limits, CARB. By end of 2025. leakage risk posed by cap-and- trade regulation, and recommended changes needed to reduce leakage, including potential for border carbon adjustment. Potential for allowance prices to reach CARB, in consultation with Market If prices at two consecutive auctions price ceiling for multiple auctions. Advisory Committee. exceed the lower speed bump. a Chapter 135 of 2017 (AB 398, E. Garcia). CARB expects to begin the formal process to amend Setting Post-2020 Caps and Banking the regulation in 2018 and finalize the amendments in Rules to Ensure State Meets Its GHG the middle of 2019. Targets In this section, we discuss some of the key regulatory decisions CARB will have to consider Current Program Allows Banking. Under the when implementing AB 398. These decisions relate current program, there is no expiration date for to (1) setting post-2020 caps and banking rules, allowances. An allowance issued today can be (2) implementing a hard price ceiling, (3) establishing purchased today and used to cover emissions in a two price speed bumps, (4) implementing new offset future year—a design feature commonly known as limits, and (5) providing industry assistance through banking. Since the annual cap on emissions becomes 2020. We also identify some key issues related to these more stringent in later years, banking gives firms an decisions to guide legislative oversight and identify incentive to obtain extra allowances in early years as a areas where the Legislature might want to consider way to protect against the risk of higher prices in later clarifying state law if it determines CARB’s actions are years when allowances are more scarce. As a result, inconsistent with legislative goals and priorities. CARB banking can change when emissions (and emission also has considerable discretion over many other reductions) occur. Relative to a program without it, critical design features of the program not specifically banking has the effect of increasing allowance prices addressed in AB 398—such as minimum auction price, (and incentives for reductions) in early years, while allowance allocations to electric utilities, and linking reducing prices (and incentives for reductions) in later the program with other jurisdictions. These particular years. This is because it shifts some of the supply of design features are outside the scope of this report. allowances from earlier years to later years. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Banking Has Significant Advantages, but downside to banking, however, is that there is a greater Also Has Trade-offs. Some of the key advantages risk that the state does not meet its specific GHG of banking include (1) less price volatility and target set in 2030. With banking, cumulative emissions (2) incentivizing some emission reduction activities are capped over the life of the program and covered in early years that are less costly than an equivalent entities have some flexibility to adjust their level of number of reductions in later years. One potential emissions between different years. Since entities can Other Major Climate and Air Quality Changes Recently Adopted In addition to extending the cap-and-trade program, the Legislature also recently adopted various other related changes. Limitations on Adopting Additional Greenhouse Gas (GHG) Regulations. Chapter 135 of 2017 (AB 398, E. Garcia) requires the California Air Resources Board (CARB) to update the Scoping Plan by January 1, 2018 and to designate cap-and-trade as the GHG reduction regulation for refineries and oil and gas production facilities. This restricts CARB from implementing a new GHG regulation focused on refineries, which was a measure included in the proposed Scoping Plan update issued in early 2017. Assembly Bill 398 also restricts local air quality management districts from implementing their own regulations intended to reduce carbon dioxide—the most common GHG—from stationary sources that are also subject to the state cap-and-trade program. State Fire Prevention Fee Suspension. Assembly Bill 398 suspends the state fire prevention fee from July 1, 2017 until January 1, 2031. The fee was imposed on landowners in State Responsibility Areas (SRAs), and the money was used to fund state fire prevention activities in these areas. The bill also expresses the Legislature’s intent to use cap-and-trade revenue to backfill the lost fee revenue and continue fire prevention activities. Subsequently, the 2017-18 budget provided $80 million from the Greenhouse Gas Reduction Fund to backfill lost SRA fee revenue. Extension and Expansion of Sales and Use Tax (SUT) Exemption for Certain Equipment. Assembly Bill 398 extends the sunset date from 2022 to 2030 for a partial SUT exemption for certain types manufacturing and research and development equipment. It also expands the exemption to include equipment for other types of activities, such as certain electric power generation and agriculture, through 2030. The bill, as amended by legislation adopted as part of the 2017-18 budget, also transfers cap-and-trade revenue to the General Fund to backfill revenue losses associated with these changes. Changes Intended to Reduce Local Air Pollution. Chapter 136 of 2017 (AB 617, C. Garcia) makes a variety of changes that are intended to reduce criteria and toxic air pollutants that have adverse effects on local communities. The key changes include (1) directing CARB to establish a uniform statewide annual reporting system; (2) requiring local air districts to adopt an expedited schedule for requiring certain facilities to install updated pollution control technologies; (3) increasing the maximum allowable penalties for violations of air quality rules; (4) requiring CARB to develop, and air districts to implement, additional air monitoring in heavily polluted communities; and (5) requiring CARB to develop a strategy to reduce air pollution in these communities. Constitutional Amendment Establishing Temporary Two-Thirds Vote Requirement for Cap-and-Trade Spending. Chapter 105 of 2017 (ACA 1, Mayes) places a proposed Constitutional Amendment on the June 2018 ballot. If the amendment passes, a two-thirds vote of the Legislature would be needed to allocate cap-and-trade revenue collected after January 1, 2024. After one such vote, any future revenue could again be allocated with a simple majority vote. Also, beginning in 2024, the manufacturing SUT exemption would be suspended until the Legislature allocated cap-and-trade funds with a two-thirds vote. www.lao.ca.gov 7 analysis full gutter AN LAO REPORT use banked allowances from earlier years to comply roughly in the middle of that range. This estimate in later years, it is possible that annual emissions from did not account for other factors that could increase these entities exceed the 2030 annual target. Although or decrease the oversupply, including the effect of there are legitimate debates about whether state linking California’s cap-and-trade program with other climate policies should focus primarily on cumulative jurisdictions, recently adopted regulatory changes or annual emissions targets, the Legislature has affecting previously unsold allowances, and updated established an annual 2030 GHG target, and banking 2016 emissions data. creates a risk of not meeting that goal. Effect of Oversupply on 2030 Target Could Be Over 200 Million Banked Allowances Could Substantial. Figure 3 illustrates a potential scenario Be Used for Post-2020 Compliance. Emissions where over 200 million banked allowances are from covered entities have been below the annual carried forward into the post-2020 program without caps for the first few years of the program, and any adjustments to the current caps. This example CARB projects emissions will remain below the assumes California emissions from covered entities annual caps through 2020. This is likely primarily the (minus offsets) decline steadily through 2030 as a result result of factors unrelated to cap-and-trade, such of incentives provided by allowance prices, as well as economic conditions and the effects of other as other factors. It also assumes no allowances are GHG reduction policies. As a result, there could be sold from the price containment points or price ceiling a substantial number of allowances banked into the (discussed in more detail below). Notably, under this post-2020 program. Earlier this year, we estimated scenario, the cap would effectively limit cumulative that by 2020 there could be a substantial number of emissions, and covered entities would be complying banked California allowances—ranging from 100 million with the regulation. However, due to the large number to 300 million allowances, with it most likely being of banked allowances, 2030 annual emissions from Figure 3 Large Number of Banked Allowances Increases Risk of Exceeding GHG Target Million Metric Tons 400 Annual Caps 2030 Emissions Target Example Emissions Scenario 200 Excess Allowances Banked Banked Allowances Used to Cover Emissions Annual Allowances Used to Cover Emissions 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GHG = green house gas. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT covered entities would be over 30 percent higher than incentives for GHG reduction strategies that are needed the levels likely needed to meet the state’s target. to meet the state’s goals. We found this general result—2030 emissions Options to Address Potential Overallocation significantly higher than the annual target—under a Concern Exist. If the Legislature decides that having couple different scenarios we analyzed. There are a large supply of banked allowances in the future is alternative scenarios where the difference is either an issue that needs to be addressed, it has several larger or smaller than the one illustrated in Figure 3. options. In general, these approaches would be aimed Some factors that could change this outcome are at reducing the number of allowances available in later (1) if emissions trends are substantially different than years of the program (including 2030). One such option the steady decline in emissions reflected in Figure 3 would be to directly reduce the supply of allowances and (2) if linking with other jurisdictions has significant issued in post-2020 years to account for some or all effects on emissions from California entities. of the allowances available to be banked from the AB 398 Directs CARB to Address Overallocation pre-2020 period. Specifically, the state could offer fewer and Consider Changes to Banking Rules. Assembly allowances in regular auctions than what is currently Bill 398 directs CARB to evaluate and address scheduled. This could reduce cumulative emissions concerns related to overallocation when determining (assuming prices do not reach the ceiling), as well as post-2020 caps. (Although overallocation is not defined reduce the risk that emissions from covered entities in the legislation, we interpret it to mean the number of substantially exceed the state’s 2030 goal. Alternatively, allowances that are banked into the post-2020 period.) the Legislature could direct CARB to establish an It also directs CARB to establish banking rules that expiration date for allowances sold in the future. This “discourage speculation, avoid financial windfalls, and would reduce the number of allowances issued in the consider the impact on complying entities and volatility next several years that could be banked and used to in the market.” comply in later years. Key Issues for Legislative Oversight. Setting the The above options would have trade-offs. For post-2020 caps are a critical design feature of the example, establishing an expiration date for allowances cap-and-trade program because the caps are the key could increase price volatility by reducing the ability to mechanisms used to limit emissions. As discussed bank allowances. In addition, both of these options above, there are important questions about whether could increase long-term allowance prices by reducing the caps and banking rules are likely to ensure the state the overall supply of allowances available in the later meets its annual 2030 GHG target, especially given the years. However, in our view, decisions about the large number of banked allowances that are likely to be number of allowances that could be available to be carried forward from the pre-2020 program. used in the later years of the program should be driven primarily by an evaluation of what is likely needed to As a result, the Legislature will want to monitor ensure the state meet its 2030 GHG goals. Other CARB’s assessment of overallocation and how it could design features that are designed specifically to limit affect the likelihood of meeting the state’s GHG goals. price increases, such as the price ceiling and price For example, the Legislature could direct CARB to containment points, are likely to be effective tools for explain how it will evaluate overallocation and outline addressing concerns about high allowance prices. In what criteria it will use to determine whether the fact, if the state reduced the number of allowances program is likely to ensure the state meets its 2030 available at future auctions, it could move those GHG goals. The Legislature could also direct CARB to allowances to the price containment points (discussed explain what type of adjustments it would likely make in below) to help mitigate potential price increases. the future if it determines that the program is likely not going to ensure the state meets its 2030 GHG targets. Setting Hard Price Ceiling at Level Clearly outlining this process in advance could give the That Balances Emissions and Costs Legislature greater confidence that the program will limit GHGs in a way that is consistent with its goals. It could Current Program Has Soft Price Ceiling. To also provide greater long-term certainty to the market, implement the soft price ceiling, CARB sets aside a which helps ensure allowance prices provide the limited number of allowances in the APCR and offers www.lao.ca.gov 9 analysis full gutter AN LAO REPORT them for sale to covered entities at predetermined predetermined price. Assembly Bill 398 seeks to price tiers—ranging from about $51 to $63 per address this issue by specifying that the revenue from allowance in 2017. This design feature is intended selling the additional compliance instruments sold at to moderate potential price spikes by increasing the the ceiling must be expended by CARB to achieve an supply of allowances if prices reach a certain level. It is equivalent number of emissions reductions. sometimes called a soft price ceiling because market Issue for Legislative Oversight. Assembly prices could still exceed the ceiling after all of the APCR Bill 398 provides CARB with significant discretion allowances are purchased. Since the overall number of in setting the level of the price ceiling. The decision allowances available is still limited, there is still a fixed requires a balancing of the state’s interests in containing limit on overall emissions in the capped sector. costs for businesses and households with the certainty AB 398 Directs CARB to Establish a Hard that targeted emission levels will be achieved. A Price Ceiling. Assembly Bill 398 directs CARB to relatively low ceiling price would do more to limit the establish a “hard” price ceiling. In contrast to a soft costs of the program on businesses and households. ceiling, a hard ceiling makes an unlimited number On the other hand, it would increase the likelihood of additional compliance instruments available for that prices reach the ceiling, thereby increasing the sale at a predetermined maximum price. (Assembly likelihood that emissions exceed the cap (by selling Bill 398 does not specify a name for these compliance additional allowances). In contrast, a higher ceiling price instruments, but in this report we refer to them as does less to limit program costs but provides greater allowances because, like allowances, they could be certainty that emissions will not exceed the cap. used as a permit for covered entities to emit GHGs.) Other factors are also worth considering when This approach is intended to ensure that market prices setting the price ceiling, such as how different price do not exceed the amount established by the ceiling. levels might affect the likelihood of linkages with other It accomplishes this goal by ensuring covered entities jurisdictions and the extent to which higher prices always have the option of purchasing compliance encourage businesses to develop different types of instruments from CARB at the ceiling price. Assembly technologies that can be used to reduce GHGs in other Bill 398 specifies that some of the allowances left in the jurisdictions. For example, in a recent workshop, CARB APCR at the end of 2020 will be sold at the price ceiling indicated that it might consider what price level might in the post-2020 program. After those allowances be needed to encourage the development of carbon are sold, CARB must offer “additional metric tons” for capture and sequestration technology. sale to covered entities at the ceiling price if needed In our view, setting the level of the price ceiling is a for compliance. Assembly Bill 398 also identifies the policy decision that will depend on how one weighs following factors that ARB must consider when setting many different factors. The Legislature will want to the level of the ceiling: monitor whether CARB is weighing these various factors in ways that are consistent with legislative • Need to avoid adverse impacts on households, priorities. If the level of the price ceiling proposed by businesses, and the state’s economy. CARB is inconsistent with legislative priorities, the • Social cost of emitting a ton of GHGs. Legislature could set the price ceiling in statute or • 2020 APCR tier prices. provide additional direction about how to weigh the • Minimum auction price. different factors. • Potential for leakage. Setting Price Containment • Cost per metric ton of GHG reductions to achieve the state’s emissions targets. Points to Limit Price Spikes CARB to Establish Price Containment Points. The primary trade-off associated with creating a Assembly Bill 398 directs CARB to create two new hard price ceiling is that the program would no longer price containment points—sometimes called speed cap overall emissions if prices reach the ceiling. bumps—at levels below the price ceiling. Assembly This is because entities could purchase an unlimited Bill 398 specifies that one-third of the allowances number of additional compliance instruments at that 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT available in the APCR at the end of 2017 be deposited Implementing New Offset Limit in each speed bump (roughly 40 million each). In Consistent With Legislative Intent concept, the speed bumps are intended to moderate Current Program Has 8 Percent Limit on Offsets. potential price spikes. This is accomplished in a manner Currently, a covered entity can use offsets to cover that is similar to the current APCR, where a limited up to 8 percent of its emissions. To date, covered number of allowances are offered at predetermined entities have used offsets to cover about 5 percent prices. However, in contrast to the APCR, the of their compliance obligations. As the Legislature speed bumps will be set at intermediate price levels considered extending cap-and-trade, there was some somewhere between the price floor and the ceiling. concern that continuing to allow up to 8 percent Issues for Legislative Oversight. CARB has offsets for compliance would result in a large share of discretion to set the price level of the speed bumps. GHG reductions coming from offset projects, relative Similar to setting the level of the price ceiling, this to reductions directly from covered entities. This was decision involves a potential trade-off between a concern largely because offset projects, many of having lower prices or lower emissions. Making more which are in other states, might be less likely to provide allowances available at a certain price helps limit price other environmental benefits to Californians—such as increases, but also permits more emissions. When reductions in local air pollutants. determining the level of the speed bumps, CARB must AB 398 Establishes Stricter Offset Limits and determine the price at which it is willing to release more Prioritizes Projects With Direct Environmental allowances in order to moderate price increases. The Benefits in California. In response to these concerns, Legislature will want to evaluate CARB’s regulatory AB 398 directs CARB to reduce the offset limit to proposal when it is available to ensure that the price 4 percent from 2021 through 2025 and to 6 percent levels at which it sets the speed bumps are consistent from 2026 through 2030. The bill also requires that no with legislative intent. If the Legislature determines more than half of these offsets can come from projects that the speed bumps are set too high or too low, it that do not provide direct environmental benefits in could set the levels in statute or provide more specific California (non-direct offsets). The bill defines direct direction to CARB about factors to consider when environmental benefits as the reduction or avoidance setting them. of any air pollutant in the state or pollutant that could In addition, in an initial workshop, CARB staff adversely affect state waters. These restrictions requested stakeholder feedback on whether it should on offsets will likely decrease the overall number place additional allowances that would otherwise go of offsets used for compliance. To make up the to the post-2020 price ceiling into the speed bumps. difference, covered entities would need to either buy More allowances in the speed bumps could increase more allowances or reduce more emissions directly. the degree to which they slow price increases but also As a result, there could be higher allowance prices. make the program less stringent once prices reach Assembly Bill 398 also establishes the Compliance certain intermediate levels. Since placing additional Offsets Protocol Task Force, made up of different allowances in the speed bumps goes beyond the stakeholder representatives appointed by CARB, to direction in AB 398, the Legislature will want to evaluate provide guidance on ways to increase offset projects CARB’s assessment of why this change might be with direct environmental benefits in the state. needed to prevent rapid price spikes and determine Issues for Legislative Oversight. CARB has a whether any such change would reflect the Legislature’s variety of implementation decisions that could affect desired balancing of the potential effects on overall the types of offset projects undertaken and the overall emissions and costs. If not consistent with its priorities, level of offsets used for compliance. For example, it the Legislature could provide additional direction to must determine which projects meet the requirements CARB that explicitly limits the number of allowances for direct environmental benefits. It is currently unclear allocated to each speed bump. whether certain types of projects would qualify, such as www.lao.ca.gov 11 analysis full gutter AN LAO REPORT forestry projects in neighboring states that could affect • Emissions Intensity Benchmark. A benchmark water in California. Rules that tend to limit the number level of GHG emissions per unit of output. This projects determined to have direct environmental benchmark is developed by CARB and reflects benefits would decrease the overall number of offsets about 90 percent of each affected industry’s available and used. The Legislature will want to monitor average emissions intensity. how CARB identifies projects that provide direct • Industry Assistance Factor. A percentage environmental benefits to ensure those decisions are assigned by CARB to each industry based on consistent with legislative intent and consider approving that industry’s risk of leakage. Industries with legislation if additional clarification is necessary. higher leakage risk can be assigned higher IAFs In addition, there is some uncertainty about how than those in industries with lower leakage risk. A the limit on non-direct offsets is applied. For example, higher IAF means a business within that industry if a company uses offsets to cover 2 percent of its receives more free allowances than if it were compliance obligation in 2021, can all 2 percent be in a lower risk industry. CARB currently divides from non-direct offsets (half of the 4 percent limit) or industries into one of three categories of leakage only 1 percent (half of the offsets used for compliance)? risk: high, medium, or low. The second interpretation would likely limit the number • Cap Adjustment Factor. A percentage that of offsets used for compliance more than the first. declines each year for all affected industries, It would also be more complex for covered entities consistent with the decline in the annual caps. to plan for the use of offsets because the number of Through 2017, CARB applied a 100 percent IAF non-direct offsets to purchase would depend, in part, to businesses in all three categories of leakage risk. on the number of direct offsets it is able to purchase, Setting the IAFs at 100 percent for all three categories which could be subject to considerable uncertainty. In was largely intended to serve as transition assistance an initial workshop, CARB staff indicated that it would to give affected companies time to adjust to the effects apply the first interpretation. The Legislature will want of the cap-and-trade program. Under the current to ensure this provision is being implemented in a way regulation, IAFs are scheduled to decrease for medium that is consistent with legislative intent and consider (75 percent) and low (50 percent) risk industries clarifying legislation if CARB adopts an inconsistent from 2018 through 2020. This change was originally approach. intended to more closely align the number of free Determining Industry Assistance Factors allowances with the level of leakage risk. Through 2020 AB 398 Requires 100 Percent IAFs for Post-2020 Program. Assembly Bill 398 directs CARB to apply Current Regulation Reduces Industry Assistance 100 percent IAFs for all three categories of leakage Factors (IAFs) in 2018. In 2017, about 15 percent of risk beginning in 2021 (but to continue to apply allowances were given for free to certain businesses the declining cap adjustment factor). However, the for industry assistance. Only those covered entities legislation does not provide direction for what IAF to operating in industries CARB has assessed as being apply in 2018 through 2020. Soon after AB 398 was at risk for leakage receive free allowances for industry enacted, the board directed staff to propose future assistance. The number of allowances given to each amendments to the regulation that would maintain all company is calculated based on four factors: IAFs at 100 percent from 2018 through 2020. • Output. The amount of product (not GHG Issues for Legislative Oversight. Maintaining the emissions) the company produces in California. higher IAFs would align with the post-2020 direction The more a business produces in California, the provided by the Legislature and could reduce leakage more allowances it receives. risk for medium- and low-risk industries. On the other hand, it also increases the risk that the state is providing 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT more allowances to medium- and low-risk industries output remains constant through the life of the program than are needed to prevent leakage. This could and is unaffected by a change in IAFs. Since higher encourage more production and consumption of some IAFs would tend to lead to higher in-state output and GHG-intensive goods, which means more in-state the number of allowances given as industry assistance, emissions from these industries. Higher emissions from the figure might underestimate the difference in these industries could mean more emission reductions allowances. are needed from other sources—which could lead Although AB 398 does not provide specific direction to higher overall costs to the extent that these other regarding industry assistance from 2018 through 2020, sources have higher costs for reducing emissions. the Legislature may want to consider whether the Figure 4 provides an estimate of industry assistance board’s direction is consistent with legislative priorities. under the current regulation and AB 398 direction, If not, the Legislature could specify in statute the IAFs as well as how the board’s direction could increase for this period. the number of free allowances for industry assistance Summary of Key Issues for Legislative Oversight. by about 8 million in each of the next few years. At Figure 5 (see next page) summarizes the key issues fall 2017 allowance prices, the value of the additional discussed above for legislative oversight of AB 398 allowances that would be allocated is over $100 million discussed in this report. in each of the three years. These estimates assume Figure 4 Industry Assistance Under Current Regulation, AB 398, and CARB Direction Allowancesa (In Millions) 60 50 40 30 20 CARB Direction to Increase IAFs 10 Current Regulation (2015-2020) and AB 398 (2021-2030) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 a Actuals for 2015 through 2016. Estimated for subsequent years. CARB = California Air Resources Board and IAF = industry assistance factor. www.lao.ca.gov 13 analysis full gutter AN LAO REPORT Figure 5 Key Issues for Legislative Oversight 9 Setting Post-2020 Caps and Banking Rules to Ensure State Meets Its GHG Targets • Evaluating CARB’s assessment of potential for large number of banked allowances carried forward into post- 2020 period and how it could affect the state meeting its 2030 GHG target. • Evaluating different options for adjustments to address a large number of banked allowances, if it is determined that it would create a significant risk of not meeting state’s 2030 target. • Ensuring there is a clear process in place to make future adjustments, if needed. 9 Setting Hard Price Ceiling at Level That Balances Emissions and Costs • Evaluating whether CARB’s proposed price ceiling weighs different trade-offs, such as interests in containing costs versus certainty that targeted emissions levels will be achieved, in accordance with legislative priorities. 9 Setting Level and Size of Two Price Containment Points to Limit Price Spikes • Evaluating whether the number of allowances in each containment point is consistent with legislative interest in slowing price increases at intermediate levels, while also limiting emissions. • Evaluating whether price containment points are set at levels where the Legislature is willing to allow greater emissions in exchange for limiting price increases. 9 Implementing New Offset Limits Consistent With Legislative Intent • Ensuring CARB’s identification of projects with direct environmental benefits is consistent with legislative intent. • Ensuring the limits on non-direct offset projects is implemented in a way that is consistent with legislative intent. 9 Determining Industry Assistance Factors Through 2020 • Evaluating whether CARB direction to maintain 100 percent IAFs through 2020 balances leakage risk and incentives for GHG-reductions in a way that is consistent with legislative priorities. GHG = greenhouse gas; CARB = California Air Resources Board; and IAF = industry assistance factor. IMPLEMENTING THE MARKET ADVISORY COMMITTEE Given the potentially significant environmental and efficiency, RPS, and LCFS—the scope of this economic effects of state GHG policies, including requirement appears rather broad. The Legislature cap-and-trade, AB 398 includes a variety of reporting could provide more specific direction about which requirements meant to enhance oversight and policies it would like the committee to focus on. accountability. Key among these is the establishment This could help ensure the committee’s workload is of the Market Advisory Committee. In our view, the manageable and make it easier to appoint members committee has the potential to provide valuable that have in-depth expertise in the policies within the information to support legislative oversight and future committee’s jurisdiction. policy and regulatory decisions. Below, we identify Role of Committee. It is not clear whether the potential areas where the Legislature might want to Legislature established the committee to (1) advise on consider clarifying or refining direction for the Market future program design issues (such as how to manage Advisory Committee to increase the likelihood that it will an oversupply of allowances) and/or (2) evaluate past provide useful information for these future decisions. program performance. Advisory activities are generally Scope of Policies Under Committee Jurisdiction. aimed at providing information to guide future program Assembly Bill 398 directs the committee to annually decisions. In contrast, program evaluations tend to report on the environmental and economic performance focus more on measuring past program outcomes. of cap-and-trade and other relevant climate policies. Although the name of the committee suggests it will Given the wide range of state policies focused on serve an advisory function, the statutory requirements climate change—such as cap-and-trade, energy suggest that it is responsible for program evaluation. In 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT a workshop on October 2017, CARB indicated that the million dollars annually—because committee members advisory committee will be responsible only for program would largely rely on their existing expertise in these evaluation. The Legislature will want to consider areas and other information that is already available. whether this approach is consistent with its intent. If Alternatively, program evaluation activities could not, it should clarify whether it would like the committee require substantially more resources for new data to advise on program design issues, evaluate program collection, modeling, and analysis. The structure of the outcomes, or both. committee could also limit the amount of analysis that CARB has indicated that to ensure that the could be conducted in a timely manner. For example, a committee’s evaluation is independent, committee similar committee established by the California Energy members will not be involved in advising on program Commission to help evaluate petroleum markets (called design issues. It is reasonable to have some concern the Petroleum Market Advisory Committee) recently about this conflict. However, this type of conflict found a significant unexplained difference in California frequently occurs when agencies are asked to evaluate gasoline prices compared to the rest of the country. their own programs. In this case, unlike agencies that However, it could not reach clear conclusions about evaluate their own programs, the committee would the cause of elevated gasoline prices and the best not be the one responsible for designing the program remedies for a variety of reasons, including: (just advising). As a result, in our view, this is a relatively • Limited staff with the necessary expertise were minor concern. Nonetheless, if this is a significant available to carry out the analysis needed by the concern for the Legislature, one option would be to committee. Less than one full-time equivalent staff establish two separate committees—one for program person from the California Energy Commission evaluation and one to advise on program design. This was available to support committee activities. would help maintain independence for each committee. • Difficulty conducting regular in-person meetings In addition, the members of each committee could because the committee members had full-time be selected based on the type of expertise that is jobs in disparate locations and did not receive most relevant for the activities within the committee’s reimbursement for travel or other expenses. jurisdiction. Committee members had full-time jobs in Irvine, Alternatively, under a scenario where there continues Berkeley, San Francisco, Stanford, and Davis. In to be only one committee, the Legislature could direct addition, under California’s Bagley-Keene open the committee to primarily serve in an advisory role meeting rules, members are limited in how much for program design while also requiring it to (1) identify they can discuss issues within the jurisdiction of high-priority areas for additional research funding the committee with each other outside of public and/or (2) help evaluate proposed research projects, meetings. particularly to ensure sound methodologies. Since the committee members would not be conducting the If the Emissions Market Advisory Committee faced research, this could reduce concerns about conflicts. similar challenges, they could adversely affect its ability We find that this approach would also more clearly to conduct timely and effective program evaluations. focus the committee’s role as advisory, while using its As discussed above, the Legislature might want to expertise in guiding effective evaluation practices. direct the committee to have a more limited role in Different Roles Could Require Different Levels helping identify areas for future research funding and/ of Resources. In our view, there is value in having or evaluate research proposals to ensure they are independent experts both advising on program design methodologically sound, rather than conducting its own issues and evaluating program outcomes. When research. This approach would also be less costly to determining which activities the committee should support than if the committee were directly responsible conduct, the potential value of these activities will have for program evaluation. However, there could still to be balanced against the level of resources that might be additional costs to fund the program evaluations be needed. For example, a committee with a narrower performed by other entities that the committee identifies scope of advising just on cap-and-trade program as high priorities. design might require fewer resources—likely less than a www.lao.ca.gov 15 analysis full gutter AN LAO REPORT Consider Identifying More Specific Outcomes to sectors of the state economy. If the committee primarily Evaluate. Assembly Bill 398 does not specify which acts in a cap-and-trade advisory role, the Legislature outcomes or program characteristics the committee could direct it to make recommendations on program should focus on. The Legislature could provide design features that would help ensure the program more specific direction about what it would like the limits price volatility, prevents market manipulation, committee to evaluate. For example, if the committee encourages the most cost-effective reductions, and is should be focused on evaluating program performance, structured in a way that likely helps the state meet its the Legislature could direct it to evaluate such things GHG targets. Providing more specific direction could as GHG emission reductions, costs of reductions, and help ensure the committee is focusing on the outcomes how those costs are distributed across the different that are of greatest interest to the Legislature. IMPLICATIONS FOR AUCTION REVENUE The extension of the cap-and-trade regulation cap-and-trade would need to encourage fewer through 2030 also extended the period in which the emission reductions and result in lower allowance state will receive revenue from cap-and-trade auctions. prices. Third, as discussed above, various regulatory While it is clear that there will be additional revenues decisions—such as setting post-2020 caps, banking to the state beyond 2020, the amount that will be rules, the level of industry assistance, and setting the generated annually is highly uncertain. Accordingly, we levels of the price ceiling and speed bumps—could also identify two potential cap-and-trade revenue scenarios have significant effects on the number of allowances below. sold and prices. Various Factors Contribute to Substantial Range of Future Revenue Could Vary by Billions Uncertainty. Over the last few years, annual revenue of Dollars Annually. Figure 6 illustrates two revenue has ranged from less than $1 billion to nearly scenarios through 2030 under different assumptions $2 billion. The amount of state revenue generated about future allowance prices. The low price scenario from future cap-and-trade auctions depends on assumes all allowances sell at the minimum price two basic factors: the number of allowances sold established by CARB from 2018 through 2030. The and the price of those allowances. Both of these high price scenario assumes prices are roughly $20 in factors, especially prices, are affected by (1) future 2018 and increase to reach a price ceiling of about “business-as-usual” (BAU) emissions, (2) the effect of $85 in 2030 (in 2017 inflation-adjusted dollars). This other GHG reduction policies, and (3) cap-and-trade scenario also assumes the price speed bumps are program design decisions. First, BAU emissions evenly distributed between the price floor and ceiling, reflect what future emissions would be if no new GHG and that they have the effect of keeping prices flat for reduction policies (including extending cap-and-trade) about one year (in 2023 and 2027). Although the speed were implemented. These future emissions would bumps slow price increases, the result is a net increase largely depend on general economic conditions and in revenue in this scenario because the state sells the technological changes, both of which are subject to additional allowances available in the speed bumps. significant uncertainty. Higher BAU emissions means Under these two scenarios, revenues would range cap-and-trade would need to encourage greater from $2 billion to $4 billion in 2018 and from $2 billion emission reductions, resulting in higher allowance to almost $7 billion in 2030. In our view, these two prices. Second, the effect of other GHG reduction scenarios provide a plausible range of future revenues. policies—such as RPS requirements and LCFS However, there are alternative scenarios where revenue standards—on emissions could affect revenue. For could be higher or lower, especially in certain years. example, a more stringent RPS or LCSF means 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Figure 6 Cap-and-Trade Revenue Scenarios Vary by Billions of Dollars Annually (In Billions, 2017 Inflation-Adjusted Dollars) $9 8 7 High Price Scenario 6 5 4 3 Low Price Scenario 2 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CONCLUSION In July 2017, the Legislature passed AB 398, to businesses and households. In this report, we extending the state’s cap-and-trade program through identify key CARB implementation decisions and major 2030. The program is one of the state’s key strategies trade-offs associated with those decisions. We also intended to ensure GHG emissions are 40 percent identify potential opportunities to improve Legislative below 1990 levels by 2030. Cap-and-trade is a oversight and future policy decisions to ensure that the complex program that requires many different design administration is implementing the program in a way decisions that could affect both emissions and costs that is consistent with legislative intent and priorities. www.lao.ca.gov 17 analysis full gutter AN LAO REPORT 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT APPENDIX: KEY CAP-AND-TRADE TERMS Allowance. A permit issued by the California Air out of California in response to higher costs associated Resources Board (CARB) to emit one ton of carbon with in-state regulations. dioxide equivalents. Allowances are either given away Offsets. Emissions credits that are generated by to certain industries, auctioned, or sold at a price ceiling undertaking certified GHG emission reduction projects or price containment point. from sources that are not subject to the state’s Allowance Price Containment Reserve (APCR). cap-and-trade program. Covered entities can use a A limited number of allowances that are set aside limited number of offsets instead of allowances. by CARB and used to implement the soft price Price Ceiling. A predetermined allowance price level ceiling. Specifically, CARB offers these allowances for that is intended to moderate or prevent price spikes sale to covered entities if allowance prices reach a above that price level. There are two types of price predetermined level. ceilings: Banking. The act of purchasing an allowance in one • Soft Price Ceiling. A predetermined allowance year, but using it for compliance in a future year. price level intended to moderate, but not Business-as-Usual (BAU) Emissions. The level necessarily prevent, price spikes. If prices reach of emissions that would occur absent any effects the soft ceiling, CARB would sell a limited number from cap-and-trade or other greenhouse gas (GHG) of allowances from the APCR. reduction policies. The level of BAU emissions is • Hard Price Ceiling. A maximum allowance price affected by such things as general economic activity that is designed to ensure that allowance prices and technological changes. do not exceed that level. If prices reach the hard Compliance Instruments. Allowances or offset ceiling, CARB would be able to sell an unlimited credits that covered entities can use to comply with the number of allowances at that price. regulation. Each instrument covers one ton of carbon dioxide equivalent. Price Containment Points (“Speed Bumps”). Emissions Cap. The number of allowances issued, Similar to the APCR, speed bumps are intended to limit as determined by CARB. Cap can be considered on price spikes by making a limited number of allowances either annual or cumulative basis. available at predetermined prices. However, for the speed bumps, allowances are made available at Greenhouse Gas Reduction Fund (GGRF). The intermediate prices between the floor and the ceiling. state fund where moneys generated from state auction or sale of allowances are deposited. Price Floor. A predetermined allowance price level that is intended to moderate or prevent price drops Industry Assistance Factor. A factor, established below that level. To implement a price floor, CARB by state law or regulation, that is used to determine the establishes a minimum price at which allowances can number of allowances given to certain industries for free be auctioned. to help prevent emissions leakage. Leakage. When emissions are shifted out of state because companies move their production of goods www.lao.ca.gov 19 analysis full gutter AN LAO REPORT 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT www.lao.ca.gov 21 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Ross Brown and reviewed by Brian Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 22 LEGISLATIVE ANALYST’S OFFICE