Cap and Trade in California: Auction Revenues and Options for the Electricity Sector

Cap and Trade in California: Auction Revenues and Options for the Electricity Sector
RFF Feature
May 24, 2012
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Beginning in 2013, California will enact an economy-wide cap-and-trade program on carbon dioxide. Estimates of the value of tradable emissions allowances in the first year range from roughly $2.6 billion to $7.8 billion, when electricity and industry are covered under the program. Those sectors will receive most of their allowances for free. In the first year, however, a fraction of allowances (mostly for future years), will be sold through an auction—yielding revenues of roughly $0.6 billion to $1.8 billion. That revenue will be returned to the California economy through appropriation by the legislature. The allowance auction revenue will grow five-fold in 2015 when transportation and natural gas are included under the cap-and-trade program.

To whom does this revenue belong, and how should it be used? This is the key unresolved issue in the design of the California program. Next10 sponsored four studies examining issues related to these questions. Two of these were conducted by RFF Darius Gaskins Senior Fellow Dallas Burtraw and coauthors David McLaughlin and Sarah Jo Szambelan, and related versions of those studies are available here as RFF discussion papers. In one, “California’s New Gold: A Primer on the Use of Allowance Value Created under the CO2 Cap-and-Trade Program,” the authors discuss the economic opportunities, legal constraints, and political path associated with appropriating these revenues. In the second, “For the Benefit of California Electricity Ratepayers: Electricity Sector Options for the Use of Allowance Value Created under California’s Cap-and-Trade Program,” the authors examine the issues relevant specifically to the electricity sector, where allowance value is to be used explicitly “for the benefit of ratepayers.”