IETA Policy Positions on California’s Cap-and-Trade Program

CONFIDENTIAL DRAFT
1 May 2023
The International Emissions Trading Association (IETA) is a 300-member nonprofit
business association that supports the use of carbon markets to address the climate
crisis. Some of our active members in California include compliance entities, financial
actors, and advisory firms. Our mission is to establish market-based trading systems for
greenhouse gas (GHG) emissions that are environmentally robust, fair, open, efficient,
accountable and consistent across boundaries.1
California’s cap-and-trade program is already reducing GHG emissions and local air
emissions. A recent peer-reviewed first-of-its-kind academic study shows a causal
reduction in GHGs of 9 percent annually at a subset of industrial facilities between 2012
and 2017 attributable solely to the cap-and-trade program. The study also finds
reductions in local air emissions including nitrogen oxides and particulate matters, which
are harmful to human health.2
A number of stakeholders are asking for more climate ambition from the cap-and-trade
program. In IETA’s view, the cap-and-trade program should be made into California’s
workhorse for achieving reductions in GHG emissions. Specifically, IETA advocates for
the cap-and-trade program to achieve at least half of California’s required reductions to
meet its climate targets.
IETA puts forth four policy positions to ensure that the cap-and-trade program acts as
California’s workhorse for achieving its climate targets.
 The program should be extended through 2045 with caps declining to net-zero
emissions;
 The program should adopt an emissions containment reserve that automatically
adjusts auction supply in response to periods of low allowance demand;
 Offsets should continue to remain a critical tool as they provide an important cost
containment means for obligated entities to comply with trading programs and
respond to volatility; and,
 The program should contain a wide range of additional compliance flexibilities
including carefully established market linkages and credible incentivization of
carbon removals.
These policy positions complement one another and in IETA’s view are not separable.
Policy Position 0: the cap-and-trade program should be a workhorse, rather than a
backstop, in achieving California’s climate targets.
 As background, allowance prices are in a remarkable 3 “goldilocks zone” between
the auction price floor and the reserve price tier in part due to the 2017 Scoping
Plan and 2018 regulatory amendments, which transitioned the program from a
backstop role expected to achieve no more than 15% of the state’s 2020 climate
target to a more assertive role expected to achieve 38% of the state’s 2030
climate target.4
 Currently, the 2022 Scoping Plan is largely silent on the role of the cap-and-trade
program, which sends mixed signals that confuse market participants. The
Legislative Analyst’s Office5 and the Joint Legislative Committee on Climate
Change Policies6 have called for the California Air Resources Board to elaborate
on the role it expects for the cap-and-trade program. IETA welcomes these calls.
 IETA believes the cap-and-trade program should be a workhorse by achieving
more than half of California’s climate targets in 2030, 2045, and beyond.
o A workhorse program would achieve reductions at dramatically lower
costs compared to command-and-control policies or government
subsidies, which cost between $60 and $18,000 per ton according to UC
Berkeley7 and the Legislative Analyst’s Office.8
o A workhorse program would bolster revenues for the California Climate
Investments program, which as of November 2022 had already awarded
more than 6.7 billion dollars—equal to 73% of total funds—to priority
populations, including disadvantaged communities and low-income
communities and households. 9
Policy Position 1: the cap-and-trade program should be extended imminently through
at least 2045 with caps declining to net-zero emissions.
 The ambiguity over whether the program extends beyond 2030 is impacting the
carbon market today. Extension would eliminate this uncertainty and strengthen
the carbon market, including bolstering revenues for California’s Climate Invest
program.
 Extending the cap-and-trade program would unleash additional climate
investments into California. According to the Independent Emissions Market
Advisory Committee, once “investors know a carbon price will exist they can
evaluate low-carbon technologies” however “the market will not effectively drive
investor behavior if the market’s future is uncertain”. 10
  Extending the market beyond 2030 alleviates concerns around banked
allowances by minimizing the overuse of any banked allowances in 2030.
 IETA believes CARB has the authority to extend the program beyond 2030 and
should do so absent legislation. That said, we prefer legislative action since it
further reduces uncertainty and reinforces the program.
o IETA’s legal analysis suggests a strong case for CARB’s authority to
extend the program beyond 2030.
o IETA’s legal analysis suggests a simple majority is all that is required for
the legislature to extend the program. However, IETA also welcomes a
supermajority vote.
Policy Position 2: the program should adopt an emissions containment reserve that
automatically adjusts auction supply in response to periods of low allowance demand.
 The emissions containment reserve complements existing cost containment
provisions in the cap-and-trade program, thereby balancing climate ambition and
economic growth.11
 The emissions containment reserve is a predictable rules-based adjustment to
allowance supply that ensures the cap-and-trade program will remain a
workhorse over time as macroeconomic conditions and policy mixes inevitably
change.
 The emissions containment reserve is also automatically implemented, such that
changes to allowance supply can occur without the need for reopening
regulation. This provides a degree of certainty over market changes.
 Rules-based automatic adjustments to allowance supply are best-practice in cap-
and-trade programs around the world. An emissions containment reserve already
operates in the Regional Greenhouse Gas Initiative. A market stability reserve
already operates in the European Union Emissions Trading System.
 The emissions containment reserve is also endorsed by Environmental Defense
Fund, the Independent Emissions Market Advisory Committee, and the
Environmental Justice Advisory Committee.
Policy Position 3: Offsets should continue to remain a critical tool as they provide an
important cost containment means for obligated entities to comply with trading programs
and respond to volatility.
 Offset based mechanisms promote innovation and represent real, verifiable and
permanent carbon reductions. Offsets can help reduce GHG emissions in all
sectors of the economy, not just those industries or sectors covered by a carbon
pricing system.
 Offset mechanisms should be based on verifiable emission reduction projects
and programs. Through the verified registries accepted under CARB and other
states’ protocols, offset mechanisms are created and vetted through a
 transparent process that recognizes business decision-making realities and is
both environmentally effective and economically efficient.
 The use of offset mechanisms should not be unduly constrained.

Policy Position 4: The program should contain a wide range of additional compliance
flexibilities including carefully established market linkages and credible incentivization of
carbon removals.
 Carbon removals must be credibly incentivized by the cap-and-trade program to
ensure California meets its carbon neutrality target efficiently.
 Carbon removals should be high-quality as outlined by IETA’s criteria for
crediting carbon geostorage projects [as well as other criteria, perhaps EU or
ICAP].12
 Carbon removal policy must be paired with permitting reforms to ensure projects
expeditiously break ground in California.
1
IETA. 2023. Our Mission. Link available here.
2
Hernandez-Cortes, Danae and Kyle C. Meng. 2023. “Do Environmental Markets Cause
Environmental Injustice? Evidence from California’s Carbon Market.” Journal of Public
Economics 217: 104786. Link available here.
3
Academic economists fully expected the price to be at the floor in response to the 2017
Scoping Plan and 2018 regulatory changes. See Borenstein, Severin et al. 2019. “Expecting
the Unexpected: Emissions Uncertainty and Environmental Market Design”. American
Economic Review 109(11): 3953-77.
4
California Air Resources Board. 2017. Final Scoping Plan.
5
Legislative Analyst’s Office. 2023. Assessing California’s Climate Policies: The 2022
Scoping Plan Update.
6
Joint Legislative Committee on Climate Change Policies and Senate Environmental Quality
Committee and Assembly Natural Resources Committee. 2023. Joint Oversight Hearing:
Assessing the 2022 Scoping Plan Update’s Strategies and Our Progress Towards Statewide
Climate Goals: Does the Roadmap Get Us There?
7
Meredith Fowlie. 2022. What’s the Plan for Carbon Pricing in California? Energy Institute
Blog.
8
Legislative Analyst’s Office. 2022. The 2022-2023 Budget: Zero-Emissions Vehicle Package.
9
California Climate Investments. 2023 Annual Report Fact Sheet.
10
Independent Emissions Market Advisory Committee. 2022 Annual Report.
11
Burtraw, D., Holt, C., Palmer, K. and W. Shobe. 2022. “Price-Responsive Allowance Supply
in Emissions Markets”. Journal of the Association of Environmental and Resource
Economists 9(5).
12
International Emissions Trading Association. 2022. High Level Criteria for Crediting Carbon
Geostorage Activities. Link available here.