Can California’s Emissions Market Survive Past 2030?

For more than a decade, California’s cap-and-trade program has been a key component of the state’s broader efforts to reduce greenhouse gas emissions and achieve a net-zero carbon economy by 2045.

Yet the future of California’s cap-and-trade program is uncertain. The program is currently authorized only through 2030, and significant debate exists over whether its administrator, the California Air Resources Board, has the legal authority to extend it beyond that date.

Danny Cullenward, a senior fellow with the Kleinman Center and vice chair of California’s Independent Emissions Market Advisory Committee, explores the political and legal questions surrounding the program’s future. He also explains how uncertainty about the program’s longevity could slow investments in clean infrastructure and limit the market’s effectiveness in driving down the state’s climate emissions.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. The state of California runs one of the world’s largest carbon markets and the largest such market in the Americas. For more than a decade, California’s cap and trade program has been an integral part of the state’s wider effort to drive down greenhouse gas emissions and reach its target of a net zero carbon economy by 2045.

Yet, the future of California’s cap and trade program is uncertain. The program is currently authorized to operate only through 2030, and there is considerable debate over whether its administrator, the California Air Resources Board, has the authority to extend it beyond that date. This is a question that has a legal basis, yet is intertwined with state politics. The program’s future and how aggressively it pursues greenhouse gas reductions hinges on unresolved questions of who will decide its fate and when.

In the meantime, uncertainty around the market’s longevity could slow investment in clean infrastructure. Here to discuss California’s cap and trade conundrum and possible paths forward is climate economist and lawyer, Danny Cullenward. Danny is a Senior Fellow with the Kleinman Center and the Vice Chair of California’s Independent Emissions Market Advisory Committee. Danny, welcome back to the podcast.

Danny Cullenward: Thanks, Andy, it’s great to be here.

Stone: So California’s cap and trade program has been around since 2013, yet its future remains uncertain after 2030. Fundamentally, why is the program’s future in question?

Cullenward: So California’s approach to climate policy begins — well, frankly, begins a long time ago, many decades ago when the state began embracing clean energy and renewable energy, much before many other states in the country. But it formally codified its climate policies with a landmark bill in 2006 that assigned the responsibility to meet what was then considered a very ambitious target for 2020 emissions to the California Air Resources Board. But the law that authorized that and set up this overall structure, which has been replicated in many states around the country, made kind of an interesting pivot.

So it assigned general authority, and it gave the regulator this responsibility to achieve a target and the authority to develop policies and programs to get there that were essentially unlimited in their time duration. But when it came to the authority to use market based climate policies, the legislature’s authorization had a time limit on that specific issue, and so the authority to use market based policies had a qualification that wasn’t present with the rest of the authorities assigned to the regulator.

And over time, we’ve seen this issue become a challenge as we’ve tried to manage this program, as well as some of the other programs in the state. But it starts with this legal story of the authorization being slightly different from market based policies, and then it gets intertwined with some really complicated issues in the state associated with anti-tax activism, and people who are familiar with California might know Prop 13, this famous proposition from the 1970s that the voters passed to amend the state constitution to restrict the legislature’s ability to pass new taxes. The voters strengthened that basic area of the constitution in 2010 and made it even more difficult to pass things that look like taxes, and we can talk about what that looks like for this program, but we get really quickly into questions around how the state constitution operates and what it takes to extend the authority for programs like the cap and trade program.

Stone: So the cap and trade program is unique in that it’s economy wide. Could you give us a brief history of the program itself and the role it’s to play in California reducing its emissions?

Cullenward: Sure. So I think maybe there’s two things to emphasize. One is, where did this program come from? And it came from activism around climate policy during the era of George W. Bush’s administration, which was formally opposed to legally binding climate policy. And so at the time, many states and many parts of Canada and Mexico were actively thinking about, what should we do about climate policy in an era when the US federal government doesn’t want to pursue that? And so there were designs to create many carbon markets around the country premised on the view that market based climate policies might attract a broader coalition of political supporters.

In the end, it was only a relatively small number of jurisdictions that pursued this, including California, is the real anchor and lead on this. And as you suggest, it covers around now three quarters of the state’s emissions. So it covers the power sector, it covers large industrial emitters. The state has a very large oil and gas industry, which is one of the principal emitters in the industrial sector. And it covers transportation fuels. So it’s got a very broad coverage. Again, at one time, it was thought that this could potentially link up with programs all around the country and in neighboring countries as well. Right now, the program is linked to a similar program in Quebec, and it might be linked in the near future to a similar program in Washington state. So its origin really comes out of how states were responding to an era when the federal government wasn’t acting on climate.

And over time, its role in the state policy portfolio has changed as well. So when the state initially began developing its climate targets, the cap and trade program was thought to play a relatively small supporting role, and in that sense, I think it succeeded. But over time, as the state’s ambitions have deepened and we’re looking to deeper targets over longer timeframes, the planning documents tend to rely more and more on this market. So in theory, we’ve said we want this market to do a lot of the work. To date, it’s only played more of a supporting role, and that’s part of the tension here as we get into the politics of what the future of the program looks like.

Stone: So it’s interesting, it started around the time that there was actually a national discussion around cap and trade. There was Waxman-Markey kind of starts a few years after that, it goes into into effect.

Cullenward: I mean, it was, I think, in some respects, designed to be, you know, a blueprint that could be adopted or considered at the federal level, and that’s not the direction the US took, or I think is likely to take in the future. But a part of its origin story was saying states can act when the federal government doesn’t want to or isn’t ready to, and maybe they can do it in a way that could be adopted by the federal government at a later date.

Stone: Okay, so now we’re reaching this point where there’s an impasse or a fork in the road at some point, because after 2030 this is no longer authorized. So what’s going on here?

Cullenward: So this comes back to the state constitutional issue I mentioned, and this is actually something I did at the end of my time in grad school, but when I was finishing grad school in 2012, 2013, I started paying attention to this market, and I had written some critical work that suggested the program was relatively lax. So this limit on pollution that it was setting wasn’t terribly binding. And this is something I was concerned about initially from an environmental integrity point of view. Will we have a robust market that achieves the goals that on paper it’s supposed to achieve?

And that issue turned out to be very important to the legal authority question, which has come up once before, and I’ll give you a short version of how that all played out. Because the program was only originally authorized through 2020 in statute, so again, the statute says to the regulator, “Go take on our targets. Do whatever you need to do to get our targets. But when it comes when it comes to market based policies, you could do it through 2020.” That implies, because everything else is assigned in perpetuity, and implies that maybe there’s a limit on that authority.

And there’s a lot of debates around how to think about that, but in 2016 and 2017, as we were getting closer to that 2020 date, the lax program caps, the relatively generous supplies in the market, combined with the relatively lax requirements, led to a market crisis incident, where basically, market participants started pulling back from the quarterly auction, saying, “We’re not sure where this is going in the future. The program is not going to fall apart, but nobody’s interested in buying more allowances because there are so many in circulation, and the future of the program is uncertain, so maybe we can kind of coast.”

Stone: So don’t invest in something you might not need after 2020 at that point?

Cullenward: Yeah, so if you’re a large emitter regulated by this program, you might say, “I can acquire more allowances on the secondary market trading privately than I need right now, and so I don’t need to participate in quarterly auctions.” So the revenues coming into the state dried up in 2016, and it called this political question, which is, what was the future of the program going to be after 2020? And in 2017, this debate was resolved when the legislature and Governor Brown got together and approved a bill on a two thirds vote basis, a super majority vote basis, which is what’s required to institute a tax in the state.

And formally, nobody ever resolved for sure, is this program a tax, as that term is understood in the state constitution, but the political action they took was to authorize the program through 2030, another time delimited authorization, which unambiguously resolves those legal and political questions as to 2030, but it continues to raise the question of what happens after 2030. And I want to be very clear, I’m not coming on your show to say there’s a — it’s a problem brewing in the market, it’s going to explode, or anything like that, but we are getting closer to 2030, and so these questions are on where the program needs to go and what’s required to get there, are coming back to us in a way that reminds me of the conversation that happened eight or nine years ago.

Stone: So we have a repeat of that previous uncertainty. We don’t know what happens with the market after 2030. As you said, the legislature, in a two thirds vote, approved the reauthorization of the program after 2020. What is the hurdle that would prevent that from happening again?

Cullenward: So there’s nothing that would prevent it from happening again, but if you think it takes a super majority vote to do this, which is the view I personally have, and again, I want to be very clear as to the legal issues there are. There’s no ambiguity. The program can run through 2030, and there are competing views out there about whether it can continue without reauthorization. And I think, at a minimum, it is fair to say there is uncertainty about that, and that uncertainty affects the market, and it affects the way people approach the market.

So if you are a regulated emitter today, or you’re a market participant today, you have to ask yourself the following question. When I think about what the price of an allowance is today, when I buy and sell in this market, do I think the price is going to be high or low? If I think the program isn’t going to continue after 2030 or we’ll have a lot of uncertainty after 2030, you might think supplies in the program have been so generous in the past relative to demand, there’s so much supply in the market, prices should be relatively low.

Conversely, if you think the program has clear authority to operate through the state’s very ambitious 2045 carbon neutrality goal, which is the position the regulator takes, then you would expect allowance prices to be quite a bit higher, because there’s going to be great scarcity over that time horizon. And you know, we can talk about which of those views is more likely the correct description of today. I think both are on the table. And I think that makes it hard to make clear investment decisions.

Stone: So as I understand it, the state’s goal is to have 40 percent reduction in greenhouse gas emissions by the year 2030. That is not a sufficient trajectory to get the state to 85 percent reduction in emissions and net zero by the year 2045. That implies that the program will need to become more stringent if you’re going to go on the glide path to that goal.

Cullenward: That’s right. And so the state regulator, in its official 2022 scoping plan, which is the planning document they prepare every five years or so, said that they wanted to achieve a 48percent reduction by 2030, not just a 40 percent reduction. I should pause. I don’t think the state is on track for a 40 percent reduction right now. So there’s another set of issues around, are we actually achieving the goals we’ve set out? But the state regulators also made clear that they wanted to increase the ambition of this program, and that’s unequivocally a necessary step to get on track. So I think that’s maybe the most important things the regulator has said, “We want to increase ambition.”

In theory, they’re saying they want to increase it so they can get on track for this 48 percent target, which makes it easier to get to the deeper target. Whether you find that story convincing, or you just say that’s a convenient way to get to more ambition, we are talking about more ambition, and that’s the correct issue, and that’s where, you know, the political challenge needs to be solved. That’s where it’s located.

Stone: Well, I want to ask you a related question. So you talked about the fact of the uncertainty about the market itself. How is that impacting investment in clean infrastructure at this point, again, with the uncertainty starting at 2030?

Cullenward: So I think for some sectors that are more directly regulated, for example, in our electricity sector, it’s probably not a huge deal, because people are already thinking about clean electricity. And the question of whether the price on carbon is $30 or $90 or somewhere in between probably isn’t a huge question when you’re already planning to build mostly clean energy and batteries anyway. But in many other sectors of the economy, including the industrial sector, if you are, for example, running a factory right now, let’s say you have a food processing plant in the Central Valley, which makes so much of the nation’s produce, you have to be thinking to yourself, “Well, I’ve probably been using a natural gas boiler, and over the timeframe of my facility’s useful life, the higher carbon price could make a significant impact on my profitability. And so maybe I want to think about decarbonizing my heat supply. Maybe I want to move to a new industrial heat pump, or other technologies to produce the heat for canning food without combusting fossil fuels.”

And now the question really matters, what’s the carbon price going to be in the future? Will there be a carbon price? And at what level will that price be? And that uncertainty is with us today. Even though, on paper, we’re saying, “What happens after 2030,” which feels like forever from now, it’s already here, that uncertainty, from the standpoint of what questions around this policy instrument mean for people taking decisions today.

Stone: Okay, so we have the uncertainty regarding the future. We also have some need for reforming of the market itself. And California’s Independent Emissions Market Advisory Committee, which you are the Vice Chairman of, has released reports looking at what those reforms should be. Can you give us an overview of, I think we started to talk about what those reforms need to be, so that the market can really help the state achieve its targets?

Cullenward: So I think maybe first thing to say is that I’m just here sharing my views. So it’s, yes, I’m a member of the committee, but I want to be clear I’m not speaking on behalf of the committee. Our reports have talked about a number of potential reforms. I think maybe the most important one to highlight is that uncertainty is with us today. And so we’ve consistently recommended that policymakers resolve that by extending and clarifying the future of the program. And so that, I think, today is maybe the number one reform is, let’s get rid of this uncertainty. Let’s have certainty about where we’re going.

When you look at the program’s performance over time, I think it’s been pretty clear that the program has not been designed to be a high ambition program. So this is a market. So the buyers and sellers in the market can set whatever price they want. But there’s a minimum price in the quarterly auctions at which new allowances are introduced into the market, and that effectively sets the minimum price in the market. And because the market supply demand balance has been relatively lax for the first decade, prices for most of the program’s history were basically read at that price floor.

It’s not been a particularly ambitious program. And I want to be clear, a modest price on carbon is much better than no price on carbon. That’s still a good thing. But it was never designed, in my view, to achieve really ambitious outcomes. Beginning in 2020 and 2021, market prices started to pick up a little. They lifted off the floor as investors, who saw the significant increase in carbon prices in Europe, started to move into the market, and domestic actors in the market started saying, “Well, what happens in the future? We could have a lot more ambition in this program over time.”

But the simple fact is, to date, every year of the program’s operation there’s been more supply of allowances and offsets than there has been emissions covered in the program. So it’s been pretty lax. And we’re now at this point where, again, that laxity is running sort of headfirst into the questions around significant ambition in the future. So one of the number one reforms we have talked about is making sure that supply demand balance is more aligned with the state’s goals. If we say we want to rely heavily on this program, we need to make it strict and binding. But that’s not how it’s been so far.

And part of the reason for all of that is when you make the program more strict and more environmentally effective, you bring in more revenue for the state. There are more rebates in the program, which are run through our utility system. So a big part of what this program does is channel resources directly to utility customers, which is great for lowering their costs. But you’re also going to visibly increase the price of energy, including with transportation fuels and all of those things. The good and the bad travel together, which is why we need to have more political certainty, including through legal certainty around what that price point should be and where we want to see that. Because right now, it’s pretty low. It’s about $30 per ton. And under the current market design, it could be easily as high as $90 a ton if demand tightened up. That’s probably too big and too rapid of a jump to make right away, but you can see questions around, is it 30, is it 90, or is it zero? Those are big changes, and we need to be very clear about where we want to land.

Stone: It’s unclear how much the market has actually contributed to the state’s decarbonization up until this point. You’re an economist. Economists have done a lot of work and have a lot of thoughts around the effectiveness of carbon pricing, cap and trade markets. My understanding here as well is that it could be a very effective tool if it is allowed to be ambitious.

Cullenward: Yeah, and so it’s not been designed to be particularly ambitious. And I want to be very clear, I’m not saying it’s bad, I’m not saying it’s not good. It was designed to play a relatively modest supporting role. And because of the way it was designed, it basically operated like a modest carbon tax for the first decade. So it’s hard when you look retrospectively at the state data, to say, “Here’s the specific outcome of this program,” because the caps have never been binding. So we know it’s not putting a hard limit on emissions. But we also know it’s produced a price on carbon, and it’s pretty clear that price has some positive effects in reducing emissions.

So I think most of the studies that have been done have concluded it’s played a positive role, but a relatively small one, and that could change, again, if we rely more on it in the future. And one of the reasons to rely on it more in the future is it’s very likely to be more cost effective than other strategies to reduce pollution. So there’s this, you know, I think, very difficult tension. And I was just talking with a colleague here on the Penn campus about this, and he said, “Well, if we’re concerned about cost effectiveness for these long term climate targets, let’s lean in more to these programs.” I said, “Yes, that’s great. That’s sound econ theory. That’s cheaper than the alternative. But it also still visibly increases prices.” And that’s the political problem.

Stone: That’s the political problem, and I want to kind of start to jump into that right now, if we can. So in 2024 CARB, the California Air Resources Board, initiated a rule making process to change the program and make some changes to the allowance budget, as I understand. What specifically is CARB proposing? Okay, and also this assumes, I guess, that CARB thinks it can go ahead and reauthorize itself.

Cullenward: Yeah, and just a small note. They didn’t formally begin the regulatory process. This is a legal nuance. They began what’s called an informal process. There’s like an official shot clock that begins when they press the official button. That button has not been pressed. But as you suggest, for a little more than a year now, they’ve been talking about potential regulatory changes in writing in public. And they’re now contemplating, I think, a couple of different changes. And again, they’ve not pressed that button. So these are just sort of informal discussions, they’re workshop presentations and other written material.

Stone: The clock isn’t ticking.

Cullenward: The clock isn’t ticking, in part, because, as we’ll get to, there’s probably a legislative dimension to this puzzle as well. But CARB is proposing to do, I would say, two broad things. One is they want to align their long term program caps with the state’s 2045 climate goal. So in theory, on the books, the program says it’s going to operate through 20, I think, 50 already. It’s at least 2045. But they did that in a 2018 rule making that was done before the state codified its 2045 target.

And the program caps on paper aren’t as ambitious as that statewide target is now in law. So they say, “We want to align with that.” And the second thing they say they want to do is increase the near term ambition of the program. They offer a couple of different rationales for why they’re thinking about it. I don’t think it’s particularly important to get into those. What they’re saying is, “We want to increase the ambition of the program.” So they’re talking about lowering the allowance budgets, the supply of allowances that come into the program, over the next five years.

And so both of those things would combine to produce much more ambition in the program. And behind all of this is the premise that they can do work after 2030. There’s no ambiguity that they can make changes through 2030. The legal authority is, I think, 100 percent clear on that. The implicit position for a long time was that CARB has the authority to continue with this program or something like it. And over the summer, CARB’s executive officer, their top civil servant, put in a public letter to one of their advisory committees that they believe they have that authority, but they haven’t, to the best of my knowledge, ever articulated how that authority would operate and how to navigate the sort of puzzle of legal and constitutional questions we’ve already brought up.

Stone: They haven’t backed up that claim.

Cullenward: Yeah, that’s fair.

Stone: So getting to this political issue a little bit more. So here we are, 2025, and let’s assume that CARB does have the authority to reauthorize the program. The politics could get messy, and one of the issues here is that CARB recently updated the state’s Low Carbon Fuel Standard, which has an impact on gas pricing. Cap and trade could also have an impact. Tell us what the potential mess here is.

Cullenward: So there’s a couple of dimensions to this. So the state has another market-based policy called the Low Carbon Fuel Standard, which applies specifically to transportation fuels. And I wrote a policy report this fall for the Climate Center on that, and went into that in a lot of detail. One of the more controversial elements of that decision was that that program is expected, when you look at the numbers, to have potentially significant impacts on gasoline and diesel prices, which are probably the most politically sensitive energy prices anywhere, including in California.

There’s two more, maybe three more dimensions to this puzzle. One is that CARB’s view of their authority for the Low Carbon Fuel Standard is that they didn’t require any legislative authority, and so they took action to do it. It’s kind of weird, this is a program that they’ve justified as a, quote unquote, early action measure from their original 2006 law. But they just said, “We can have a program operating through 2045 on the basis of an early action measure.” That’s their official position.

So the cap and trade program overlaps with that program, including on the transportation fuel sector. So the carbon price in the cap and trade program does increase the price of gasoline and diesel fuels by a small amount when carbon prices are low and by a larger amount when they’re high. So if we’re going to extend the program and reform it to make it stronger and produce a higher carbon price, we’re going to also amplify those effects, in addition to all of the other good things.

Stone: Is that generally supported outside of CARB?

Cullenward: That is, I think, something that may be contested. There is already lawsuits against CARB on this issue, and I don’t remember if that’s in it, but that was certainly part of the regulatory debate that led to the litigation. But their view was that they didn’t need affirmative authority to act, and so they acted. They took a vote to approve this regulatory package, I think, three days after the federal election, when you can imagine most people were not focused on this intricate, you know, bizarre rule making process.

Stone: That had originally been scheduled for March of 2024, is that right?

Cullenward: Correct. So there was some political controversy over the price impacts, and the regulator pulled the planned vote in the spring of 2024 and scheduled it for right after the election, which I don’t think is an accident, but they acted unilaterally is the point. And again, that’s already in court. There are fights about that. There are, you know, political debates in the legislature about that program. But whatever you make of that issue, and I certainly expressed some criticisms about that, it’s had this, I think, complicated political effect, because it’s pretty clear to me, and again, CARB has taken the official position that, as to the cap and trade program, they could do something similar if they wanted to.

I think most people would say, at a minimum, there’s legal uncertainty here. And part of creating certainty in the market is creating legal certainty. And we may need not just a legislative vote, but a super majority legislative vote. And so if you think that’s the goal, which I do, I want to see a clear and certain carbon price, whatever it is, you will probably need legislative action. And the concern I expressed, and part of the reason I spoke as vocally as I did about the low carbon fuel standard, is I worried that a difficult vote that was unilateral in the regulatory space would prejudice and impact the politics of a much bigger and I think more important program that requires a very tough affirmative vote in the legislature.

The last thing, and this is actually really critical to the politics, it’s not just who acts, the regulator or the legislature, and how tough of an act do they need to take. It’s also a question of how money moves in the program, and in the Low Carbon Fuel Standard, about 80 percent of the credits to date have gone to biofuels, which I think are very questionable in terms of their environmental impact. They’re also mostly outside the state. So the program asks drivers to —

Stone: You mean the recipients are — ?

Cullenward: Yeah, the credits in the program which creates the value to market participants does mostly go to out of state biofuels. So it’s essentially a program that asks drivers to pay a little more for clean fuels, and the recipients of those funds are mostly out of state biofuel producers. When you look at the cap and trade program, you see a very different structure. The cap and trade program provides significant revenues to the state, which are spent on a variety of climate and housing and transit projects in the state, and it also supports several billion dollars a year in utility customer benefits, including direct rebates to utility customers.

So when you look at how the money flows in these two programs, in the Low Carbon Fuel Standard, it’s mostly going to out of state biofuels. It is also going, about a quarter of it today, to in state electrification projects, but it’s mostly moving outside the state. When you look at the cap and trade program, it’s basically all inside the state, and it’s all towards things that are relatively popular and also, I think, good economic policy. So they’re very different in that dimension, which makes the sort of political emphasis that the regulator took on the Low Carbon Fuel Standard program, I think, even more prejudicial from a political perspective. Asking people to pay more for biofuels that don’t come mostly from the state, that’s a harder political question than asking people to pay a little bit more for in state investments in housing and transit, climate programs, and utility rebates.

Stone: Let me just make sure I understand this clearly. So if this is decided legislatively, a two thirds vote to make this happen, what is the balance, generally, in California, in the State House? Are the votes to make that happen currently available?

Cullenward: I mean, in theory, they’re available, and they — you know, this happened once before in 2017. So the state tends to have approximately a super majority of Democrats in both Houses. Although what the state Democratic Party includes is a variety of constituencies that, you know, maybe you wouldn’t always associate with Democratic Party. And there are Democratic legislators from, you know, a variety of places in the state that have, you know, strong connections to the oil and gas or agricultural industries. It’s a very diverse state politically, but the Democratic Party has super majorities within the Democratic caucus. There are lots of different interests, from urban to rural, from rich to agricultural. There’s all sorts of different constituencies in the state political system.

Stone: So if cap and trade is a tax, and if the legislature, therefore, must reauthorize it with a two thirds vote, does the legislature simply reauthorize it and then CARB can do whatever it wants to do, as it did with the Low Carbon Fuel Standard, or does the legislature put some kind of guardrails around that?

Cullenward: It’s a great question, and I should mention, the last time this was done, in 2017 there were a couple of bipartisan votes as well, and I think that politically didn’t work very well for the Republican Party. Some of the members who voted for the bill were sort of primaried and attacked within their constituency. But part of the goal here was, can we reach some sort of broader consensus? And so it’s not just a single party question, but exactly as you say, if there is going to be a decision taken, what does it look like? Well, in the first bill in Assembly Bill 32 from 2006, this was what we call a delegation statute, they basically said to CARB, “Just go do it. You figure out pretty much all of the details. A couple of very high level instructions.”

In the first Extension Bill from 2017, there was more instruction. They said, “Please add in a maximum price. Please think about the following criteria when you do a maximum price.” There were a couple of political deals around who was going to make certain benefits from the program that were codified, but it was still principally a delegation statute, by which I mean the legislature said, “You can do it. There’s a few more guardrails, but a lot of discretion as to the policy choices and market design choices you make.”

And all of those options, and including a much more prescriptive approach, are potential options the legislature might consider. The other thing, I’ll just to call this out, the market design of the program, where we set the minimum and maximum prices, how lax or stringent do we make the program, these are all market design questions that have typically been delegated to CARB. The budget side of the program, what you do with the money that comes into the state from auctioning the allowances, which is part of how we distribute the allowances, a little less than half our auction to raise in revenue for the state, that’s always been a legislative question, and that will continue to be a legislative question. That’s a budget question.

Stone: So if this goes to the legislature, it’s going to be out in the open politically. Again, it’s not clear to what extent legislature would put guardrails on what CARB can do, but I just want to understand a little bit more, what are the constraints that would shape that debate? What potential guardrails might it be politically necessary to put on, if at all, from the legislature onto CARB to allow this to go forward?

Cullenward: And that’s a question, really, for legislators, but what I would say about this is that, you know, I think the primary political challenges, we have a relatively modest carbon price, a little less than $30 a ton as of the last auction. And we have a price ceiling, a maximum price in the program that’s closer to $90. It’s a little bit above that. If prices were to move there quickly, I think that would be a political problem. I suspect many people would say that’s too much, too fast. And part of the problem here is, if you were to provide clarity to the market that we’re not going to end in 2030, for sure, we’re not going to end in 2030, and we’re trying to be more ambitious in the future, you would expect prices to rise.

How fast and how far? I think it’s hard to predict. There’s some modeling studies that are out there, but it’s it’s really hard to say with certainty. And so I think one of the principal challenges is that we had designed a program that sort of operated on the low end of its market design. It was sort of moving around the price floor. And I think as we look to providing long term certainty, we now need to shift our focus and say, “Where are the sort of maximum prices we want to see?”

And rather than create a market design where achieving a high price could be considered a political problem, I think it would be wise to design a program where we set limits on the prices that we don’t consider to be a political problem, that we say, “That’s actually a desirable outcome if we got there. It’s fine if we got there. We’re happy if we land there.” And so I think one of the most important considerations is going to be, do we want to set the price ceiling in a different place, higher than where the price is today, but maybe lower than where, in theory, it could be tomorrow, if the current program were reauthorized, and prices have the potential to move much higher than they are today, maybe more quickly than people want?

Stone: Okay, so it sounds like it will get reauthorized. That’s at least likely. The level of ambition is still a question, if I’m understanding this correctly.

Cullenward: I honestly don’t feel like I could make a strong statement. I mean, I think it’s a really tough time. I want to be really clear. I’ve been very critical of this program for a long time. I think having this program is a really positive thing for the state. Clarifying its future is really important. But I also want to acknowledge it’s a very tough vote in a very tough time. I’m hopeful people will work this out, but there’s a lot of work to be done to get there.

Stone: Okay, so let’s say it doesn’t get reauthorized. One possibility. Let’s say another possibility. It gets reauthorized, but the end result is a not very ambitious cap and trade program. What are the other tools in California’s scoping plan toolbox, and can they deliver California to the reductions in carbon dioxide emissions that it needs to reach its mid century goals?

Cullenward: So I have to say, I’ve done a lot of work looking at these long term climate planning documents. And earlier in my life, when I was working on my dissertation in grad school, I was studying how people made energy model forecasts from the 1970s oil crises forward, to think about what is life in 2000 or 2010 going to look like? And the short answer is, pretty much everybody got it badly wrong, and it instilled in me a sort of visceral reaction against long term projections, or at least, you could call it a skepticism, but maybe it’s a kind of humility, that it’s really hard to project over those time horizons.

I don’t really think those long term plans are the most serious or credible way, anywhere, in any jurisdiction. It’s really hard to talk about those long term issues. The state has a lot of other tools. I think the state’s been really good with its clean energy, its electricity system. We’ve been at the forefront of installing batteries in the state, and really showing how batteries have come in. I don’t know if you remember issues like the so-called Duck Curve. Back when renewables were first getting integrated into the grid, we were seeing a ton of clean energy production in the middle of the day, and then a very crazy ramping period on the grid where natural gas would have to turn on quickly and hard to ramp up, and it forms the, some people said the shape of a duck, when you look at the sort of curve of the demand over a day.

And batteries have really eaten into that remarkably quickly in ways that, I think, 10 years ago probably didn’t look very credible. If somebody had told you 2025 would look like this, you would say, “Yeah, it seems pretty radical.” And I think everywhere we look, we see evidence that, you know, things can change quickly. So I’m nervous sort of saying, “Here’s what’s in the scoping plan, and here’s, you know what to do with all of it.” It’s tough.

And I think the biggest issue in the state, where there really aren’t any good answers, and this is true in a lot of places, is the transportation sector. We are not building enough housing. We are building housing, to the extent we are, in places that require people to drive. And we’ve been hoping that EV turnover will be much more rapid than it has been, even though the state has been at the forefront of electric vehicle adoption. So I am increasingly convinced that if you really want to tackle transportation emissions, you have to solve the housing crisis. And that is a whole other set of issues where the state is in the middle of those fights, but I would not tell you that the problem has been solved or that we’re on the precipice of a solution. The crisis is mounting. But I think that’s ultimately one of the most important things in climate policy right now, is being serious that transportation sector emissions, we’re not just going to electrify our way to zero. We have to build completely different ways of living.

Stone: Getting back to this question of the reauthorization of the cap and trade program. Something’s going to break. Something’s going to have to break, right? When does this decision get made, from who initiates the process, to really make this come to a head?

Cullenward: Yeah, and I want to be clear, when I mentioned earlier that the regulator has said that it has the necessary authority, I don’t want to sort of beat up on them about this. If nothing were to happen, that’s got to be their fallback position. And so I’m not surprised that they begin with that position.

Stone: But there would be legal jeopardy following that as well.

Cullenward: There could be challenges, and there was a challenge against the program actually previously around some of these weird, esoteric tax issues in the state, and the program was upheld under an older legal standard. But I don’t think anyone would — should want a scenario where that question gets challenged in court. So if the legislature says, you know, “Never mind, we don’t want to do this, or it’s too hard, or whatever,” the ball would be in the regulator’s hands. And, you know, they could proceed with the rule making, and there might be, you know, uncertainty, and there might be legal challenge.

In the legislature, both the State Assembly and the State Senate have members who are working on this issue, publicly announced that they’re working on it. And there are, as of this recording, spot bills in both houses. And a spot bill is the term we have for a bill that says, “We’re going to introduce legislation on this specific topic.” But they haven’t fleshed out the details yet. So in both Houses, we know what the legislative vehicle is, and there’s active conversations.

So the best case outcome is one, I think, in which the legislature continues to work on this, and through discussions that I presume would be across the regulator and the legislative process, would produce a super majority vote. That’s the outcome that resolves all of this legal and political uncertainty. And I’m still hopeful that’s very much on the table. But it’s not the only option.

Stone: Is this going to be kind of an example of brinkmanship, that we wait until the last moment to see something happen, and then we have these years in between of great uncertainty in the market?

Cullenward: Potentially. But again, there is a story you can tell where this happens this year, and a sort of joke in Sacramento is you tend to have, you know, these late last minute negotiations in the peak of the summer heat, like in August is when a lot of these things get done. So, you know, it’s possible that you could see something happen in this legislative cycle and signed into law this summer or fall. That’s a great outcome if we get there. It’s a really positive outcome.

If that doesn’t happen, you know, the question would be that California has a two year legislative cycle. So we’re in year one of the two year legislative cycle. So in theory, it could get deferred to the next year. And I don’t think, again, we’re in this point where there’s like an alarm bell going off about, we’re almost out of time. The longer we wait, the greater this uncertainty and the stress amounts, and the more we look like what was happening in 2016 and 2017, where we’re getting close to that real question around where is the future this program going? If market prices fall back to the floor, we should start to say, “Boy, the timing is getting, you know, much more pressing.”

We’re not there yet, but we’re also not very far off the floor either. So another possibility is there’s a delay, and that might also prompt more engagement if there’s, you know, a big issue to deal with. I want to be positive about this. I think it’s really good that people are talking about this. And frankly, you know, at the end of last year, both Houses made, you know, statements to the effect of, “We know this is an issue. This is a priority, and we’re working on it,” which is, in political terms, just an enormous amount of foresight. Like, this is a very wonky issue that we’re talking about, and to see legislators stand up and say, “We’re going to start working on this.”

I think people understand it’s an issue. Because energy price impacts are so politically sensitive everywhere, and especially in California, it’s a tough issue to work on. I’m hopeful there will be resolution this year. If there isn’t, you know, we need to start getting really serious about what’s going to happen next.

Stone: Danny, thank you for talking.

Cullenward: Thanks so much for having me.

Stone: Today’s guest has been Danny Cullenward, a Senior Fellow with the Climate Center and the Vice Chair of California’s Independent Emissions Market Advisory Committee. For more podcasts as well as energy policy research, blogs and events, visit the Kleinman Center website, where you can also sign up for our monthly newsletter. Our web address is Kleinmanenergy.upenn.edu. Thanks for listening to Energy Policy Now and have a great day.