Assessing California's Climate Policies—The 2022 Scoping Plan Update

AN LAO REPORT Assessing California’s Climate Policies The 2022 Scoping Plan Update GABRIEL PETEK | LEGISLATIVE ANALYST | JANUARY 2023 SUMMARY 2022 Scoping Plan Update Identifies Pathway to Long-Term 2045 Greenhouse Gas (GHG) Goal. California has established statutory goals for reducing statewide GHG emissions—down to at least 40 percent below the 1990 level by 2030, and to at least 85 percent below the 1990 level by 2045. The California Air Resources Board (CARB) must develop a plan for meeting these goals, and update this Scoping Plan every five years. In its recently adopted plan, CARB selects its preferred pathway to meeting the state’s long-term 2045 GHG goal, and adopts a new, more ambitious goal for 2030 (48 percent reduction below the 1990 level). Plan Lacks a Clear Strategy for Meeting 2030 GHG Goals. In this brief, we evaluate CARB’s plan for meeting the state’s 2030 GHG goals. Despite the significant reductions needed to meet these goals, CARB’s plan does not identify which specific policies it will implement. For example, the plan is unclear regarding how much the state will rely on financial incentives, sector-specific regulatory programs, or cap-and-trade. Rather, the plan’s estimated reductions are driven primarily by assumptions developed by CARB, without specifying how those assumed outcomes might be achieved. The lack of focus on policy options is a missed opportunity that has important ramifications for California’s overall GHG reduction efforts, including: • The lack of specificity likely will lead to delayed action, as it defaults to state departments to identify necessary implementation steps. This increases the risk that the state will not meet its statutory 2030 GHG goal, much less CARB’s more ambitious target. • If the state needs to adopt policy changes in a relatively short period of time to meet its goal, this could be costlier and/or disruptive for private businesses and households. • The plan does not provide the Legislature with sufficient information—such as about cost-effectiveness, distributional impacts, or other environmental impacts—to evaluate the merits of new policies that might be needed to meet the 2030 goal. • Failing to develop a credible plan to meet statewide GHG goals could adversely affect California’s ability to serve as an effective model for other jurisdictions or demonstrate global leadership. Cap-and-Trade Program Is Not Currently Positioned to Close 2030 Emissions Gap. CARB indicates that it will evaluate the cap-and-trade program in 2023 to determine whether changes are needed to help meet its 2030 goal. We find that cap-and-trade is not currently positioned to ensure the state meets it statutory 2030 GHG goal, much less CARB’s more ambitious target. In short, the program is not stringent enough to drive the additional emission reductions needed because there will be more than enough allowances available for covered entities to continue to emit at levels exceeding the 2030 target. This could also lead to relatively low allowance prices, as well as reduced and volatile cap-and-trade auction revenue. Recommend Legislature Require CARB to Clarify 2030 Plan and Consider Cap-and-Trade Changes. We recommend the Legislature direct CARB to submit a report to the Legislature by July 31, 2023 that clarifies its plan for reducing GHG emissions to meet the 2030 statutory goal. We also recommend the Legislature consider changes to the cap-and-trade program to address concerns about program stringency. Potential modification options include: reducing the supply of allowances issued in future years, limiting the use of offsets (credits generated from GHG reductions taken by entities not covered by cap-and-trade), and extending the program beyond 2030. www.lao.ca.gov 1 AN LAO REPORT INTRODUCTION BACKGROUND In this brief, we describe and assess the Legislature Has Set Various GHG Goals. California Air Resources Board’s (CARB’s) 2022 The Legislature has adopted three successive Scoping Plan Update (hereafter Scoping Plan)— statewide GHG emission reduction goals (also the state’s primary plan for how it will reduce its known as targets): greenhouse gas (GHG) emissions. Specifically, • 2020. Chapter 488 of 2006 (AB 32, Núñez/ our brief includes: (1) background on statewide Pavley) established the goal of limiting GHG GHG emissions and emission reduction goals, emissions statewide to the 1990 level by 2020. (2) an overview of the 2022 Scoping Plan Update, • 2030. Chapter 249 of 2016 (SB 32, Pavley) (3) an assessment of CARB’s plan to achieve extended the limit to at least 40 percent below the state’s 2030 GHG reduction goal, and the 1990 level by 2030. (4) recommendations for legislative next steps. • 2045. Chapter 337 of 2022 (AB 1279, This brief was developed pursuant to Chapter 135 Muratsuchi) extended the limit to at least of 2017 (AB 398, E. Garcia), which requires 85 percent below the 1990 level by 2045. our office to report annually on the economic Assembly Bill 1279 also established a goal of impacts and benefits of the state’s 2020 and zero net carbon emissions by 2045, commonly 2030 GHG goals. known as carbon neutrality. (For more detail Focus of This Brief Is on 2030 GHG Goal. on carbon neutrality, see the box below.) As we discuss in more detail later in this brief, the Legislature has adopted specific statewide GHG emission goals for 2020, 2030, and 2045. We focus this analysis on CARB’s plan for achieving What Is Carbon Neutrality? the 2030 goal. The main reasons we choose to Carbon neutrality is when the amount focus on the 2030 goal, rather than the long-term of greenhouse gasses (GHGs) being 2045 goal, are: added to the atmosphere (sources) • This brief is submitted pursuant to our AB 398 equals the amount of GHGs that are statutory requirement which directs our office being removed from the atmosphere to assess the impacts of achieving the state’s (sinks). Sources of GHGs include carbon 2030 GHG goal, but does not reference the dioxide emissions from fossil fuel 2045 goal. combustion and methane emissions from agricultural activities—all of • The 2030 goal reflects the state’s next which are part of the state’s emission significant GHG reduction benchmark reduction targets described in this and a key interim step towards putting the brief. However, carbon neutrality also state on track to try to meet its long-term incorporates other sources as well as 2045 GHG goal. sinks that are not typically counted • Economic impacts and benefits depend as part of state emissions, such as heavily on technological advancements of net changes in the amount of carbon various GHG-reduction technologies and in forests and the amount of carbon changes in broad economic conditions, both dioxide that is removed from the of which are difficult to forecast over long atmosphere and stored underground. time horizons. While even evaluating potential These types of activities are also known environmental and economic impacts in 2030 as carbon dioxide removal. is challenging, the effects in 2045 are subject to far greater uncertainty. 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT State Met 2020 Target Early, Figure 1 but 2030 and 2045 Goals More Ambitious. As shown in Figure 1, Summary of Statewide GHG Targets statewide GHG emissions have Millions of Metric Tons of Carbon Dioxide Equivalent decreased in recent years— dropping below the 2020 target 600 several years ahead of schedule. However, emissions would need to decline much faster in order to 500 meet the 2030 and 2045 targets. Actual Emissions 1990 Emissions For context, from 2010 to 2019, by 2020 emissions declined by about 400 1 percent annually. In contrast, meeting statutory statewide emission reduction goals would 300 require average annual reductions 40 percent below of 4 percent from 2019 to 2030, and 1990 level by 2030 9 percent between 2030 and 2045. 200 Notably, statewide emissions declined substantially in 2020— 100 mostly due to reduced driving 85 percent below and economic activity in the initial 1990 level by 2045 months of the pandemic. However, preliminary data show that 2010 2015 2020 2025 2030 2035 2040 2045 emissions subsequently bounced GHG = greenhouse gas. back in 2021, suggesting that much of the reduction was temporary. • The range of projected GHG emissions Similarly, although a potential reductions that result from the measure. future period of reduced economic activity—such as a recession—likely would result in another dip • The range of projected air pollution reductions in emissions, temporary changes in economic that result from the measure. activity alone are unlikely to drive the magnitude of • The cost-effectiveness of the measure. emission reductions needed to meet the 2030 goal, much less the sustained reductions needed to meet OVERVIEW OF 2022 the longer-term 2045 target. SCOPING PLAN UPDATE CARB Required to Develop Scoping Plan After conducting a series of workshops over for Meeting Statewide GHG Targets. State law the last couple of years and issuing a draft plan in requires CARB to develop a Scoping Plan and May 2022, CARB formally adopted its final 2022 update it at least every five years. The Scoping Plan Scoping Plan Update in December 2022. In this is meant to identify CARB’s strategy for achieving section, we provide an overview of the plan. the statewide GHG targets. Statute requires that the plan must, among other things, identify and Plan Highlights Several Potential Scenarios make recommendations on measures to facilitate and Selects Preferred Path. As a starting point, the achievement of the maximum technologically CARB estimates emissions under a “Reference feasible and cost-effective reductions of GHGs. Scenario,” which is meant to reflect what future In addition, for each emissions reduction emissions would be under current state practices measure identified in the plan, it must identify the and policies (excepting any potential emission following information: reductions from the state’s cap-and-trade program). www.lao.ca.gov 3 AN LAO REPORT As shown in Figure 2, the board estimates that under the Reference Figure 2 Scenario, the state would fail to State Would Meet GHG Goals meet both its 2030 and 2045 GHG Under CARB's Scoping Plan Scenario goals. CARB then models four Millions of Metric Tons of Carbon Dioxide Equivalent different alternative scenarios— each making different assumptions 600 about how and when the state reduces emissions. To model the four alternative scenarios, CARB 500 makes various assumptions about Actual Emissions household behavior—such as 1990 Emissions by 2020 per capita vehicle miles traveled 400 (VMT)—and technology adoption— such as how many electric heat Reference Scenario pumps are installed in buildings, 300 how many refineries install carbon 40 percent below capture and storage (CCS), and 1990 level by 2030 how much carbon dioxide removal 200 is deployed. Alternatives 1 and 2 Scoping Plan Scenario would achieve carbon neutrality by 2035, whereas Alternatives 3 and 4 100 would achieve carbon neutrality in 85 percent below 1990 level by 2045 2045. Figure 3 summarizes some of the key assumptions CARB used 2010 2015 2020 2025 2030 2035 2040 2045 to develop the four alternatives it modeled in the plan. GHG = greenhouse gas and CARB = California Air Resources Board. CARB selected Alternative 3— also known as the Scoping Plan exclusively on effects in 2035 and 2045, with limited Scenario—as its preferred modeling scenario information on the projected effects in 2030. (CARB for taking actions to achieve the state’s GHG analyzes 2035 effects because Alternatives 1 and 2 emissions reduction goals. According to CARB, would seek to achieve carbon neutrality by 2035.) this alternative most closely aligns with existing Identifies More Aggressive 2030 GHG statute and executive orders, and best achieves Goal. As it relates to the 2030 goal, perhaps the balance of cost-effectiveness, health benefits, the most significant change in the 2022 plan (as and technological feasibility. Figure 2 displays compared to previous Scoping Plans) is that it CARB’s projections for GHG reductions under this identifies a new GHG target of 48 percent below Scoping Plan Scenario. As shown in the figure the 1990 level, compared to the current statutory and discussed below, these projections assume goal of 40 percent below. (Hereafter, we will that under this scenario, the state will be below its refer to the 48 percent reduction as the Scoping statutory GHG target in 2030. Plan goal and the 40 percent reduction as the Focuses on 2045 Goals. Most of the plan— statutory goal.) Current law requires the state to including the modeling and analysis—focuses reduce GHG emissions by at least 40 percent on the state’s long-term 2045 carbon neutrality below the 1990 level by 2030, but does not goal. For example, under each alternative, CARB specify an alternative goal. According to CARB, estimates GHG emission reductions, air pollution a focus on the lower target is needed to put the reductions, and cost-effectiveness associated state on a path to meeting the newly established with different groups of emission reduction 2045 goal, consistent with the overall path to measures. However, these estimates focus almost 2045 carbon neutrality. 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Figure 3 Summary of Scoping Plan’s Four Scenarios Scenario Alternative 3 (Scoping Plan Assumptions Alternative 1 Alternative 2 Scenario) Alternative 4 Reductions in per • 25 percent by 2030. • 15 percent by 2030. • 25 percent by 2030. • 10 percent by 2030. capita vehicle miles • 30 percent by 2035. • 20 percent by 2035. • 30 percent by 2045. • 15 percent by 2045. traveled Adoption of light-duty • 100 percent ZEV sales • 100 percent ZEV sales • 100 percent ZEV sales • 100 percent ZEV sales ZEVs by 2030. by 2030. by 2035. by 2040. • Only ZEVs on road by 2035. Changes to petroleum • Phase out all refining • CCS on majority of • CCS on majority of • CCS on majority of refining by 2035. refineries by 2030. refineries by 2030. refineries by 2030. • Declining production • Declining production • Declining production in line with petroleum in line with petroleum in line with petroleum demand. demand. demand. Sales of electric • 80 percent by 2025. • 80 percent by 2030. • 80 percent by 2030. • 75 percent by 2030. HVAC and water • 100 percent by 2030. • 100 percent by 2045. • 100 percent by 2045. • 100 percent by 2045. heaters for existing • All buildings retrofitted • Appliances replaced • Appliances replaced • Appliances replaced buildings to electric appliances at end of life. at end of life. at end of life. by 2035. Reductions in dairy • 1 percent to 2 percent • 1 percent decrease in • 0.5 percent decrease • 0.5 percent decrease methane emissions decrease in dairy cow dairy cow population. in dairy cow in dairy cow population. • 330 additional population. population. • 750 alternative alternative manure • 210 additional • 210 additional manure management management projects alternative manure alternative manure projects by 2030. by 2030. management projects management projects • No additional dairy • 420 additional diary by 2030. by 2030. digesters. digesters by 2030. • 380 additional diary • 390 additional diary • Enteric strategies • Enteric strategies digesters by 2030. digesters by 2030. reduce emissions reduce methane • Enteric strategies • Enteric strategies by 50 percent on emissions by reduce methane reduce methane 75 percent of total 50 percent on emissions by emissions by operations. 75 percent of total 30 percent on 30 percent on operations. 50 percent of total 50 percent of total operations. operations. Carbon dioxide • 22 million tons • 60 million tons • 75 million tons • 99 million tons removal annually by 2045. annually by 2045. annually by 2045. annually by 2045. ZEV = zero-emission vehicle; CCS = carbon capture and storage; and HVAC = heating, ventilation, and air conditioning. ASSESSMENT OF PLAN Plan Lacks Clear Strategy for TO MEET 2030 GOALS Meeting 2030 GHG Goals Based on our assessment of CARB’s plan In this section, we assess how well the 2022 for reducing emissions by 2030—including both Scoping Plan Update positions the state to meet its addressing the statutory goal and the newly 2030 GHG reduction goal. We find that the plan’s identified Scoping Plan goal—we have two lack of specific policy strategies could result in a primary findings: (1) the plan lacks a clear strategy number of negative implications. for meeting the 2030 GHG goals and (2) the Meeting 2030 Goals Will Require Major cap-and-trade program is not currently positioned Acceleration of Emission Reductions. Meeting to close a 2030 emissions gap. the 2030 statutory goal for reducing GHG emissions by 40 percent below the 1990 level already would require the state to significantly www.lao.ca.gov 5 AN LAO REPORT accelerate its rate of emission reductions, relative to • Building Electrification. The plan assumes historical norms. On average, the state has reduced 80 percent of new heating, ventilation, and emissions by about 1 percent annually over the last air conditioning and water heater sales will decade. As previously mentioned, meeting the 2030 be electric by 2030, in both residential and statutory goal would require a 4 percent average commercial buildings. Under current policy, annual reduction. However, as noted above, the CARB assumes 15 percent of sales will Scoping Plan sets an even more ambitious target of be electric. reducing GHG emissions by 48 percent below the These assumptions are significant drivers of 1990 level. This would require a 5 percent average the overall emission reductions the Scoping Plan annual reduction from 2019 to 2030—an even Scenario expects the state to achieve in 2030. greater acceleration of existing trends. For context, The plan does not, however, provide any clear since 2000, statewide annual emissions have only description of what types of policies will drive these ever dropped by more than 3 percent twice: changes. For example, it is unclear how much the • A 6 percent reduction occurred from 2008 state will rely on financial incentives, sector-specific to 2009. This was around the time of the regulatory programs, or cap-and-trade to achieve Great Recession. Also, in 2009, CARB made these reductions. The current plan does not some changes to the way it counts emissions provide any clear direction or roadmap for these from electricity imports, which could have types of decisions. Instead, CARB indicates that contributed to its calculated drop in emissions. an evaluation of all major programs will be needed • A 9 percent reduction occurred from 2019 to assess their effectiveness and their specific to 2020. This was during the first year of the GHG reduction objectives between now and 2030. COVID-19 pandemic so it reflected many (The plan includes some estimated impacts of temporary, rather than permanent, changes in adopting different technologies and behaviors business and household behaviors. needed to meet the 2045 goal, but these do not focus on specific policies that might be used to Plan Lacks a Clear Description of What meet the 2030 goal.) Policy Approaches Will Be Deployed to Reduce Lack of Clear Policy Approach Has Several Emissions. Generally, the plan does not identify Key Downsides. In our view, the lack of focus which policies will be used to reduce emissions on policy options in the Scoping Plan Update is a in order to meet the 2030 targets (for either the missed opportunity that has important ramifications statutory goal or the Scoping Plan goal). Rather, for California’s overall GHG reduction efforts. the plan’s estimated reductions are primarily driven The major downsides include: by assumptions developed by CARB and the third-party contractors who led the modeling effort, • Delayed Action Increases Risk That State without specifying how those assumed outcomes Will Not Meet 2030 Goal. Without a clear might be achieved. The assumptions for the policy approach articulated in the Scoping Scoping Plan Scenario were selected to illustrate Plan, how—and whether—the state will meet a scenario where the state meets its targets. the statutory 2030 GHG goal is unclear, much For example, the plan assumes the state will make less how it will meet the more ambitious the following changes: Scoping Plan goal. The lack of specific direction means that state departments will • VMT. The plan assumes a 25 percent reduction need to spend additional time and effort to in per capita VMT by 2030. In contrast, CARB identify and evaluate what policy changes will assumes continuing with current policies (the be required to achieve the intended outcomes Reference Scenario) would lead to a 4 percent before they can even begin the process of reduction in VMT by 2045. adopting and implementing those changes. • CCS. The plan assumes CCS will be Overall, many of these efforts likely will take installed on 70 percent of refineries by 2030. years. Such a delay increases the risk that the Under current policy, CARB assumes no CCS state will not meet its 2030 goal. will be installed on refinery operations. 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT • Rushed Policy Implementation Could Be about 1 percent of global GHGs, the ultimate More Costly. Even if state departments do success of its climate policies depends on take subsequent actions to identify, evaluate, whether it spurs emission reductions in other and adopt new or modified policies in order jurisdictions. For example, California might to try to meet the ambitious 2030 targets, influence other jurisdictions by demonstrating these policies would then need to achieve how to adopt and implement a plan to achieve reductions in a relatively short period of time. ambitious GHG reduction goals. However, A more rushed implementation time line could failing to develop a credible plan to meet be costlier and/or more disruptive for private statewide goals could limit the degree to businesses and households. which California can serve as an effective • Limits Information Available for Key model for other jurisdictions. This could Legislative Decisions. Different policy lead to California missing an opportunity to approaches are likely to have varying expedite global progress on limiting the extent associated advantages and disadvantages, of climate change. including the magnitude of GHG reductions, improvements in local air pollution, economic Cap-and-Trade Program Not Currently costs, and how costs and benefits are Positioned to Close 2030 Emissions Gap distributed across various groups. However, In this section, we provide our assessment of without a clearly articulated policy approach, whether we believe the cap-and-trade program— evaluating trade-offs associated with as currently structured—can help ensure that the specific policies used to meet the 2030 state meets its 2030 goals. We find that, although target is difficult—thereby limiting the the program can be a cost-effective way to amount of information that the Legislature achieve GHG goals, cap-and-trade is not currently has available to make near-term budget and positioned to make up for any significant shortfall in policy decisions. Specifically, the plan lacks emissions reductions from other programs. information that the Legislature could use to Scoping Plan Update Does Not Specify Role evaluate the costs and benefits of a new policy for Cap-and-Trade. The cap-and-trade program that might be needed to meet the 2030 goal, covers sectors and activities that represent how its impacts would be distributed across about 75 percent of statewide GHG emissions— different households, and how it compares to primarily emissions from transportation fuels, alternative emission reduction measures. For electricity, natural gas, and industrial activities. example, if the Legislature were considering In its 2017 Scoping Plan Update, CARB expected whether to allocate funding for either providing non-cap-and-trade programs to achieve roughly rebates for electric heat pumps or for electric half of the emission reductions needed to meet the trucks, it would lack helpful information to statutory 2030 annual target, with cap-and-trade inform this decision, including the respective making up the other half. Moreover, the 2017 plan programmatic costs per ton of GHGs reduced, then identified cap-and-trade as the state policy how much each activity would reduce local that would serve as a “backstop” to ensure the state air pollution, and how the benefits of each meets its target. That is, the plan explicitly stated activity would accrue to different regions that to the degree other policies collectively fell or households. short of meeting the state’s GHG reduction goals— • Could Adversely Affect California’s Ability sometimes referred as an emissions gap—the to Demonstrate Global Leadership. cap-and-trade program would reduce emissions The lack of a clear plan might have other further to make up the difference. In contrast, the downsides that are more difficult to identify, 2022 Scoping Plan Update does not specify what but nonetheless important for California’s role cap-and-trade is expected to play in reducing effort to encourage global action on climate emissions. Instead, CARB indicates that the change. Since California represents only administration will submit a report to the Legislature www.lao.ca.gov 7 AN LAO REPORT by the end of 2023 containing potential suggestions additional emission reductions needed to close on programmatic changes to ensure the program is a 2030 emissions gap. One key reason for this is well-positioned to help the state meet its goals. because there will be more than enough allowances Cap-and-Trade Can Be a Cost-Effective Way available for covered entities to continue to emit at to Achieve GHG Goals… Economywide carbon levels exceeding the 2030 target. As we described pricing policies, such as cap-and-trade, generally in our 2017 report, Cap-and-Trade: Issues for have been found to be the most cost-effective Legislative Oversight, the program allows unlimited approaches to reducing GHG emissions. In a banking of allowances from earlier years, which can cap-and-trade program, covered entities face then be used to comply with more strict caps in a choice to either (1) purchase allowances or later years. If a significant number of allowances are offsets to be able to continue to emit, or (2) reduce “banked” in the earlier years, covered entities can emissions. As a result, the program sends price then continue emitting GHGs in 2030 at levels that signals to households and businesses to encourage exceed the state’s targets. them to identify and undertake low-cost emission Figure 4 illustrates an example of how this could reduction activities. (For more information occur, under a scenario where covered emissions on this issue, see our previous reports—The track CARB’s Reference Scenario and continue 2017-18 Budget: Cap-and-Trade, Assessing to make up about 75 percent of total statewide California Climate Policies—Transportation, emissions. Assuming no program modifications or and Assessing California’s Climate Policies— extension of the cap-and-trade program beyond Electricity Generation.) Also, in theory, the “cap” 2030, covered emissions would be only 29 percent on emissions—which controls emissions by limiting below the 1990 level in 2030 (236 million metric the number of allowances issued—can serve as a tons of carbon dioxide equivalent)—which would backstop to other programs and policies to ensure the state meets Figure 4 certain goals. Strict enforcement of this cap can thereby reduce Example of How Cap-and-Trade Allowances uncertainty about whether the Banked in Earlier Years Can Be Used in Later Years state will meet its overall emission Millions of Metric Tons of Carbon Dioxide Equivalent reduction goals, even if other factors—such as unsuccessful 450 policy implementation or changing Unused Allowances Banked From Earlier Years economic conditions—drive 400 emissions higher than expected. 350 As a result, we think using Program Caps Banked Allowances Used to cap-and-trade as a key policy tool Comply in Later Years 300 for achieving the state’s GHG goals Emissions is a reasonable approach. 250 …But Program Is Not Currently Well-Positioned to Ensure State 200 40 Percent Below Meets Its 2030 Target. In practice, 1990 Level by 2030 however, the cap-and-trade 150 program currently is not calibrated 100 in a way that will allow it to serve as the backstop for meeting the state’s 50 statutory 2030 goal, much less the more ambitious Scoping Plan target. In short, the program is not stringent 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 enough—that is, it will not drive the 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT fail to meet both the statutory goal (reduce to • Reduced and Volatile GGRF Revenue. As 201 million metric tons) and Scoping Plan goal allowance prices decline, so too will the state (reduce to 175 million metric tons). We also estimate cap-and-trade auction revenue that goes that a cumulative total of about 200 million unused into the Greenhouse Gas Reduction Fund allowances would remain at the end of 2030. As (GGRF). These monies fund a wide variety of a result, covered entities would have more than environmental and transportation programs. enough allowances to comply with the regulation As covered entities begin to see that more without actually needing to reduce their emissions allowances than they need are available, some any farther. of the allowances offered at state auctions Program Stringency Is a Concern Under A likely will go unsold. As a result, the state will Range of Scenarios. The example in Figure 4 is have very low and/or volatile GGRF revenue only one of many possible scenarios, as significant at these auctions—making it more difficult uncertainty about future emissions remains. to fund the various programs that typically However, under a wide range of different emissions rely on GGRF funding, including programs scenarios that we analyzed—including a scenario intended to help the state meet its GHG where covered emissions decline more slowly reduction goals. This revenue scenario could (1 percent annually) and a scenario where covered be somewhat similar to the auction results emissions decline more quickly (nearly 4 percent from 2016 and early 2017, where the state sold annually)—the state would fail to meet its statutory very few allowances and generated almost goal and a significant number of unused allowances no revenue. (See our report, The 2017-2018 would remain at the end of 2030. Notably, a Budget: Cap-and-Trade, for more details.) significant decline in emissions driven by other policies or economic conditions also would result in RECOMMENDATIONS even more unused allowances—making it even less Require CARB to Clarify Plan for Meeting likely that cap-and-trade could act as a backstop to 2030 Goals. We recommend the Legislature limit emissions and close any remaining emissions direct CARB to submit a report to the Legislature gap in 2030. by July 31, 2023 that clarifies its plan for reducing Lack of Program Stringency Also Affects GHG emissions to meet 2030 goals. As part Allowance Prices and Auction Revenue. An of this report, CARB should identify new or overall supply of allowances that significantly expanded policies that would be used to meet exceeds demand also results in relatively low both the statutory goal and the Scoping Plan goal, allowance prices and affects future state revenue including the role that it expects cap-and-trade from cap-and-trade auctions—both of which could to play. The report should also include additional make it harder for the state to meet its GHG goals in details about the estimated emission reductions, 2030 and future years. air pollution reductions, distributional impacts, • Low Allowance Prices. An over-supply of and cost-effectiveness of each of those policies. allowances eventually will result in a significant Such a report would help the Legislature: drop in their market price—likely to levels near (1) evaluate the feasibility of the administration’s or below the floor price established by CARB. new 2030 goal, (2) assess whether it agrees with When prices would drop to these levels is the administration’s policy approach or whether unclear, but they likely would approach the it would like to pursue a modified approach, floor as market participants (such as covered (3) identify potential policy or budget actions entities) become more confident that there needed to meet the Legislature’s 2030 benchmark, will be excess allowances available through and (4) ensure there is adequate legislative 2030. Although reduced allowance prices oversight of the administration’s implementation of mean lower direct costs for households and the plan. We recognize that specifying the details businesses, they also mean the cap-and-trade of every policy and conducting a thorough analysis program would have less of an effect of each policy might not be feasible by July 2023. on emissions. However, given the available resources at CARB, www.lao.ca.gov 9 AN LAO REPORT we think providing a significant amount of additional • Extending the Program Beyond 2030. detail and analysis is both reasonable to expect and The current cap-and-trade program operates valuable for legislative decision-making. through 2030. Providing clear legislative Consider Changes to Cap-and-Trade authority for a post-2030 cap-and-trade Program to Make It More Consistent With program could give covered entities more of Legislative Goals. We recommend the Legislature an incentive to reduce emissions before 2030, consider changes to the cap-and-trade program in preparation for the post-2030 period when to address concerns about stringency, and make the state’s emission reduction goals become it more consistent with achieving 2030 GHG goals. more aggressive and allowances could The state has several options for modifying the therefore—if the program still exists—become program, including one or more of the following: more expensive. Although an extension would not necessarily ensure the program works as • Reducing Supply of Allowances Issued a 2030 backstop, it could increase allowance in Future Years. The state could employ prices and encourage additional emission several possible approaches to reducing the reductions before 2030. Whether additional future supply of allowances. For example, legislative authority is needed for CARB to the state could reduce the number of new extend the program beyond 2030 currently allowances issued in future years based on is unclear. a periodic assessment of whether the size of the allowance bank exceeds predetermined A complete analysis and discussion of potential thresholds. This would put upward pressure program modifications is beyond the scope of on allowance prices, but make the program this report. However, the 2021 Annual Report more stringent. CARB already has authority to of the Independent Emissions Market Advisory make these types of changes. Committee discusses some of these options in • Limiting Use of Offsets. Offsets are credits more detail. Given the wide variety of potential generated by entities undertaking GHG modifications and the trade-offs associated emission reduction projects from sources that with each approach, we recommend the are not covered by the state’s cap-and-trade Legislature hold hearings in 2023 to have CARB program (uncapped sources), such as forestry report on the changes it is considering to the projects that increase or maintain carbon in program. Specifically, as part of such hearings, the forests. Covered entities can purchase we recommend directing CARB to explain how these offsets and use them (instead of potential programmatic changes would address allowances) to cover some of their emissions concerns about program stringency and help the (up to 4 percent of their emissions through state meet its near-term GHG goals. 2025, and 6 percent of emissions from 2026 CONCLUSION through 2030). Offsets allow covered entities to emit at higher levels than they otherwise The Legislature has established an ambitious would, in exchange for emission reductions 2030 GHG reduction goal and tasked CARB elsewhere, often outside of California. with developing a plan for achieving this goal. Limiting, eliminating, or modifying the use Unfortunately, CARB’s updated plan lacks of offsets in the program could encourage important details about how the state can achieve greater emission reductions from covered this approaching objective. Going forward, we entities within California. Some changes to the recommend the Legislature seek additional use of offsets would require new legislation. information from the administration about the policies it plans to implement to achieve GHG targets, including potential changes to the cap-and-trade program that make it more consistent with the state’s 2030 goals. 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT www.lao.ca.gov 11 AN LAO REPORT LAO PUBLICATIONS This report was prepared by Ross Brown, and reviewed by Rachel Ehlers and Anthony Simbol. 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, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE