Talking in Tonnes, Negotiating in Dollars: The Politics of Carbon Markets in California

Carbon markets promise environmental benefits and economic efficiency, but political forces constrain their ambition and render their implementation opaque. Drawing on case studies from California, I show how carbon prices are formed and how money flows in two multi-billion-dollar carbon markets. Although state climate policymakers emphasize the primacy of greenhouse gas emissions accounting across the state’s policy portfolio, actual emissions accounting practices are often lax, ad hoc, and internally inconsistent, with patterns that reflect the influence of political interest groups and the state regulator’s strategic objectives.

As California enters its third decade of climate policymaking and looks toward a 2045 net-zero emissions target, rising carbon prices and their impacts on consumer-facing energy prices are likely to prompt a confrontation between stakeholder groups. To keep prices low, will California continue to rely on lax accounting practices and low-quality offsetting projects, largely based outside the state? Or will concerns around costs motivate carbon-market design that explicitly limits costs and directs a larger share of funding to in-state activities that support California’s decarbonization agenda?