Affordability Concerns at Center of Cap-and-Trade Renewal Debate

When California’s flagship climate program was last reauthorized in 2017, the biggest champions of cap-and-trade were looking to the future.

“This isn’t for me, I’ll be dead,” then-Gov. Jerry Brown thundered at a panel of state senators, as negotiations intensified that summer.

Brown’s goal was to forge a bipartisan coalition to limit planet-warming emissions, balancing the concerns of environmentalists and industry to solidify California’s global leadership and avoid the worst climate damages he foresaw: vector disease, mass migrations, and “Southern California burning up.”

Eight years later, the costs of climate change have arrived. Intense wildfires are driving up the price of electricity and home insurance for Californians already struggling with affordability.

Climate-fueled costs have injected a new dynamic into negotiations over extending cap-and-trade before the legislative session ends Sept. 12. The program raises billions of dollars every year from polluters, and Gov. Gavin Newsom and state lawmakers are debating ways to use that money to lower the costs of a warming state and follow through on their post-election promises to prioritize affordability.

“This is a policy that has driven down greenhouse gas emissions, but really for Californians to really experience it, they want to see something that is much more readily salient in their everyday lives,” said Kyle Meng, an economics professor at UC Santa Barbara.

Cap-and-trade, first authorized in 2006 under Republican Gov. Arnold Schwarzenegger, sets a declining cap on greenhouse gas emissions for refineries, power plants and various manufacturers covered by the program. Companies must stay under the cap either by reducing emissions, purchasing pollution allowances at quarterly auctions or using free allowances, which the state grants to prevent job loss.

In July of 2017, Brown signed legislation extending the program until 2030.

Less than three months later, dozens of fires broke out across the North Bay, eventually killing 44 people and burning more than 21,000 homes.

The North Bay fires marked the start of a new era: wildfires no longer smoldered in rural forestland but tore through neighborhoods from Santa Rosa to Paradise, claiming lives and homes. The costs of those blazes are piling up even outside fire zones. Home insurers are raising premiums on all policyholders as the market teeters under the weight of massive fire payouts. Electric utilities, found guilty of starting some fires and desperate to avoid future ignitions, are passing liability and safety costs to ratepayers, driving up energy bills.

An analysis from the California Energy Commission found that average residential electricity rates spiked in the years after the 2017 wildfires. California now has the second-highest electricity rates in the nation.

The auctions for pollution allowances have brought in $31.4 billion since they began in 2012.

Lawmakers are now eyeing that money to pay for wildfire prevention or to offset the costs those blazes are adding to Californians’ pocketbooks.

“If you’re facing not just the need to mitigate climate change but also very large climate change adaptation costs called ‘wildfire,’ you might be tempted to say we need to invest the money,” said Michael Wara, director of Stanford’s climate and energy policy program.

“At the same time, if you’re concerned about electricity affordability, or energy affordability — or just affordability full stop — you might say the best thing is to give people money in one way or another to help them afford the energy services that they need in California, be it transportation or electricity,” he added. “It’s a big decision.”

Negotiations to extend cap-and-trade to 2045 have moved slowly behind closed doors for much of the year. The program is complex, and just 21 of the state’s 120 legislators were in office for the last reauthorization vote. But the talks have become more urgent as auction returns earlier this year faltered, reflecting uncertainty about the future of the program.

Last week, Assemblymember Jacqui Irwin, a Democrat from Ventura County, introduced a plan from Assembly Democrats to extend the program. To make electricity more affordable, Irwin is proposing a revamp of the California Climate Credit.

The credit is currently paid to utility ratepayers twice a year, typically in April and October. PG&E customers, for example, receive two credits of $58.23 this year, regardless of power usage. Utilities pay for the program by auctioning off free cap-and-trade allowances granted by the state.

Irwin’s plan would shift the credit to the hotter summer months, when Californians run air conditioning. The proposal would also integrate the credit directly into bills based on usage rather than providing lump-sum payments.

“People that have the highest utility bills, people that are in hot areas that don’t necessarily have solar or battery backup, people that have lower incomes are going to see the biggest decrease in their bills during those summer months,” Irwin said.

The expansion would be funded by reducing the allowances the state currently grants to natural gas providers and giving them instead to electric utilities.

Affordability concerns are also informing the debate over how to spend the $4 billion to $5 billion raised annually in the state’s Greenhouse Gas Reduction Fund.

Irwin said her bill would set up “baskets” of funding priorities, such as transportation, clean air and wildfire prevention — and create a more rigorous process of evaluating programs for their effectiveness.

“It should be spent to reduce emissions at the lowest cost, but we also need to look at vulnerable communities that have suffered the most because of climate change, and we need to invest in those communities too,” Irwin said.

Historically, 25% of the fund has gone toward constructing the state’s high-speed rail system. Another 20% has been earmarked for building housing near transit, while 15% funds local buses and rail operations — all projects aimed at reducing future vehicle emissions.

“There was this notion for a long time that, well, what do you do with the money from the cap-and-trade? You use it to drive down greenhouse gas emissions,” said Meng, who previously served on the White House Council of Economic Advisors during the Biden administration. “And my view of that as an economist is like — that’s not quite right.”

The carbon cap and auction price, Meng argued, already exists as a forcing function for businesses to drive down emissions in a cost-effective manner. As companies make investments and adaptations to get below the cap, revenue from the auctions could be spent on other problems, such as reducing the cost of residential energy bills.

“[Lowering] electricity prices is certainly one of those big items that could make it much more visible and maybe allow the program to endure,” Meng said.

With the cost of living still a top concern for California voters, many lawmakers believe cap-and-trade’s long-term political survival hinges on whether residents see tangible benefits from the program.

Sen. Josh Becker, a Peninsula Democrat, pointed to the example of Washington state, where voters overwhelmingly rejected a measure to repeal its cap-and-trade program last year.

“They made sure that the revenues from the program helped people every day — things like free transit for people under 18,” Becker said. “So when they had a ballot measure to challenge their cap-and-trade program, the cap-and-trade program won with over 60%, because people could feel the impact.”

Becker has written Senate Bill 254, which would not only shift the credit to warmer summer months but also increase the payment to low-income households.

“Making that clear, getting to the times when they need it most, increasing it, that’s one of the things that will make people say: ‘Oh okay, this is the benefit of this program,’” Becker added.

Newsom has his own ideas for spending cap-and-trade revenue.

The governor and a handful of legislators want to set aside $1 billion every year from the cap-and-trade fund for high-speed rail. Newsom also convinced lawmakers this year to allocate another $1 billion from the fund for CAL FIRE, the state’s firefighting force.

Wade Crowfoot, Newsom’s secretary of natural resources, told KQED Forum that protecting communities from catastrophic wildfires is crucial for addressing the costs of climate change.

“There’s a really strong argument that some of that funding for cap-and-trade can go to things that will limit our pollution — but also protect our people,” Crowfoot said. “Wildfire resilience is a great example, because the fact is, catastrophic wildfire not only threatens our communities and is really scary and dangerous — it’s a huge source of emissions.”

Oil and gas executives have also seized on the call to prioritize affordability in the cap-and-trade talks.

They note the program already adds an estimated 23 cents to the cost of every gallon of gas, citing a report from the Legislative Analyst’s Office. And with two refinery closure announcements in the last year, one in Los Angeles and another in Benicia, industry leaders are warning that the costs of complying with an even stricter cap could drive more refineries out of business.

“I think cap-and-trade…[has] to be paused for a minimum of 10 or 15 or 20 years,” Andy Walz, Chevron’s president of downstream, midstream and chemicals, told POLITICO. “They need to just pause it and see what happens to the market.”

Irwin said Walz is going “completely down the wrong track,” but she acknowledged it would be difficult to completely eliminate free allowances granted to oil and gas companies. Her bill would increase the use of offsets, letting polluters pay for climate investments to compensate for emissions.

“We really cannot afford to lose more refineries in California,” Irwin said. “Because in the end, we could work very hard on affordability on our utility bills, and if we see that people’s gas bills are going up…every time they fill their car, that is really problematic.”

But the price at the pump could be dwarfed by the mounting climate costs. A report from consumer information site ClaimGuide projected over $16.3 billion in expected annual losses from climate disasters in California, the highest price tag in the nation.

Taking a cue from the state of Washington, Newsom is proposing to rename California’s program “Cap-and-Invest,” in hopes of showcasing the financial benefits that can flow to residents from the emissions cap.

“We think it’s very important that people understand that we have this cap-and-invest program,” Irwin said. “And part of it is being used to lower their bills.”