In April, Southern California Edison customers will see an $86 credit automatically appear on their monthly bill, while Southern California Gas customers will get a credit of $73.
Then, in October, Edison customers will see their bills drop by another $86.
Similar rebates are being doled out this year to customers of investor-owned utilities throughout California, with more than $1.6 billion due back to electric customers, $1 billion to natural gas customers and $160 million to small businesses.
These rebates are called “climate credits.” The state launched them a decade ago to offset how electricity and gas bills might otherwise be affected by the costs some companies pay to comply with California’s pioneering cap-and-trade program, which requires utilities and other industries to reduce their greenhouse gas emissions to help fight climate change and clean the air.
Thanks to surging demand for the carbon pollution credits that fund these dividends (under a rather complex system we’ll get to soon), this year’s rebates are the biggest in the program’s 10-year history. And Danny Cullenward, a climate economist who serves on a committee that analyzes the state’s cap-and-trade program, said he expects utility customers to get even more money back in future years, as emissions rules get stricter for the roughly 450 electricity utilities, large industrial businesses and fuel suppliers that have to comply.
The credits have helped to prove wrong predictions some taxpayer and conservative groups made 15 years ago about how cap-and-trade would send utility bills through the roof. Analysis by the Legislative Analyst Office and other researchers shows that the program has actually had a net positive impact on Californian’s electric bills and has been nearly neutral for natural gas prices.
At the same time, cap-and-trade has helped reduce the carbon intensity of the state’s economy by 50.8% between 2000 and 2021, noted Katelyn Roedner Sutter, California state director for the Environmental Defense Fund. The program also has generated more than $10 billion for other climate efforts without slowing economic growth.
That doesn’t mean cap-and-trade doesn’t still face some real challenges.
Analysts say companies have banked too many inexpensive pollution credits, for example, which isn’t helping the state meet its emission targets for 2030. Also, while the cap-and-trade isn’t inflating utility rates, electric and gas bills do keep shooting up. A recent report from the state utility commission shows Edison’s rates are up 91% over the past decade, now averaging $220 a month. More than one in five Edison customers have overdue payments, the report states, with late customers owing an average of $733 each.
Regulators say other climate-related factors are responsible for driving up those rates. That includes utilities paying to prevent and mitigate wildfires by spending millions to harden their systems and pay out settlements to victims of fires caused by their equipment. Regulators say rates also are spiking because utilities are paying for new power lines to keep up with the push for electrification and because they’re losing revenue to rooftop solar.
Ever-increasing rates are why Mark Toney, executive director of The Utility Reform Network, or TURN, said most people likely haven’t even noticed the climate credits they’ve received on their gas and electric bills over the past decade.
But all of these experts said they do see opportunities for legislative fixes and regulatory reforms to the cap-and-trade program that could force companies to cut emissions faster while helping Californians keep more money in their pockets.
What is cap-and-trade?
This all started with Assembly Bill 32, also known as the California Global Warming Solutions Act of 2006.
The legislation set targets for California to reduce planet-warming greenhouse gas emissions to 1990 levels by 2020 — a goal the state met four years early. Next up is a goal to cut emissions 40% below 1990 levels by 2030, and to 80% below 1990 levels by 2050.
To hit those goals, California in 2013 became the first state to launch a comprehensive cap-and-trade program. All oil refineries, large manufacturing facilities, and investor-owned utilities — roughly 450 entities that are collectively responsible for creating 75% to 85% of the state’s greenhouse gases as they operate — must comply with the program.
Here’s how it works.
The California Air Resources Board, or CARB, sets a declining cap on the total amount of greenhouse gas that can be emitted in the state each year. The hope is that oil companies, manufacturers and utilities will do all they can to reduce their emissions and stay below that collective cap.
But regulators know most companies aren’t there yet. So CARB also makes available a certain number of “allowances,” with each one carrying rights to emit one metric ton of carbon dioxide — about as much as a passenger car would emit while being driven from Los Angeles to Pittsburgh.
Most manufacturers and utilities get a share of allowances for free, while oil and other industrial sectors must buy credits at virtual auctions held once a quarter. Owners of a carbon credit can use it immediately, or bank it for future needs. (Companies can also buy “offsets,” which means paying to help preserve a forest or contribute to other programs that fight climate change, though those can only account for up to 4% of their emissions.)
Each year, the state carves out fewer allowances. Also, CARB raises the floor price of those allowances, while the statewide annual cap declines. And outside investors also can buy the allowances, then resell them to companies when they’re needed.
All of those conditions mean that prices and competition for carbon credits keep going up, which creates more incentive for companies to reduce their emissions and avoid allowances altogether.
During the state’s most recent auction, in February, more than 51 million allowances sold for $41 each, a total of nearly $2.1 billion. Auctions generate upwards of $4 billion in revenue a year.
The state’s portion of that money feeds into the Greenhouse Gas Reduction Fund, which goes to communities to help them offer incentives for individuals to buy clean vehicles, plant trees, make their homes more energy efficient and fund other climate-related projects. Los Angeles County has received more than $2.3 billion in funds from the program to date, per a state dashboard, with $464 million has gone to Orange County, $458 million to San Bernardino County and $413 million to Riverside County.
About those rebates…
So where do the climate credits that most Californians will see on their utility bills in April come into play?
Lawmakers and regulators recognized when they were designing the cap-and-trade program that there was a potential for it to make utility bills soar. So they decided to have CARB give electric and natural gas utilities allowances for free each year. The utilities get to sell those allowances at auction, then use the proceeds to send rebates back to their customers.
Electric utilities send credits in April and October, while natural gas utilities only send them in April.
Public utilities, such as the Los Angeles Department of Water and Power, aren’t included in the program because they aren’t regulated by the state. But, this year, climate credits will be sent to more than 11 million residential electric customers, more than 1 million small business electric customers and more than 13 million residential natural gas customers.
Southwest Gas customers will see $75 rebates next month, while a total of $215 will be dropped from San Diego Gas & Electric bills by fall. Amounts vary between utilities, but all customers get the same amount from that company regardless of the size of their bill. On average, most people will see $146 rebates in April on their combined utility bills.
In past years, Edison rebates have ranged from $29 to $71. This year, they hit $86. If customers have a balance bigger than $86, utility spokesman Jeff Monford said the total due will drop by that amount. If they owe less than $86, Monford said, “The remaining credit gets rolled to the next month and will be applied on the following bill.”
The rebates keep going up because the price for allowances keeps going up, noted Terrie Prosper, spokesperson for the state utilities commission.
One factor that’s likely helping to drive up the price tag on allowances is talk of reforming the cap-and-trade program, Cullenward said. Since companies can bank as many allowances as they want for future use, he said it makes sense that they’d be trying to snap up whatever they can now in case the rules get stricter down the road.
The bad news about higher allowance prices is it means oil companies and other sectors will likely pass those increased costs off to customers. And while cap-and-trade hasn’t spiked utility bills, it has made other costs go up.
That includes the price of gasoline, which the air board estimates is up 27 cents a gallon (about 5% based on current prices) as a result of oil and gas companies passing along their costs to comply with cap-and-trade. But Cullenward notes that’s really a feature of the systen, not a bug, because the broader goal is to transition away from fossil fuels.
The good news about the rising cost of allowances is the greater incentive it creates for companies to pollute less. That means cleaner air and less of all the bad stuff that comes along with global warming, from extreme weather events to health risks to pricier groceries.
Also, the more expensive allowances get, the more money utility customers will get back in rebates each year.
Since most of the factors driving the surge in utility bills are tied to climate change, Cullenward sees an opportunity for the state to use cap-and-trade’s successful climate credit program to help make utility bills more affordable going forward.
That could mean the state giving utilities more free carbon polluting allowances, he said, which they would then have to auction off to create more revenue for rebates to customers. Or it could mean the state dedicating some portion of the revenue it gets from the rest of auction sales to climate credits instead of sending it all to the Greenhouse Gas Reduction Fund.
The utility reform group TURN is backing a bill from Assemblymember Al Muratsuchi, D-Torrance, that would use revenue from cap-and-trade to create a Climate Equity Trust Fund. The idea, Toney said, is to have utilities use money from that fund to help, say, build out electric charging stations for trucks in Ontario rather than having Edison pass those costs along to all ratepayers on their monthly bills.
Something’s gotta give when it comes to utility prices. So Toney said building on the successes of the cap-and-trade program just makes sense.
