The document discusses California's Assembly Bill 32 (AB-32), which established a cap-and-trade program to reduce greenhouse gas emissions to 1990 levels by 2020. The program sets a cap on emissions and allows companies to trade allowances to emit greenhouse gases. If a company emits less than its allowances, it can sell the extra allowances. If it emits more, it must buy more allowances. This incentivizes companies to cut emissions in the most cost-effective way. The program has led companies to reduce emissions while the state's economy and job growth continue to expand, showing that climate policy and economic prosperity can be aligned.

1. California Assembly Bill 32: GHG Cap and Trade Program
Sam Barton and Alexa Kandaris
Department of Economics, Humboldt State University
BENEFITS
HOW CAP AND TRADE WORKS
INTRODUCTION PURCHASING & RETIRING ALLOWANCES
WORK CITED
In 2006 the California State Assembly passed Assembly Bill 32, or the California
Global Warming Solutions Act. AB-32 appointed the Air Resources Board as lead
agency to implement a reduction in greenhouse gas (GHG) emissions back to 1990
levels by 2020. One of the ways that the ARB is facilitating this reduction is through
the development and implementation of California's first GHG emissions cap and
trade program. The program sets a maximum amount of allowable emissions for the
industry (the "cap") then enables individual businesses to "trade" emissions
allowances . Trading creates incentives to reduce GHGs below allowable levels
through investments in clean technologies. (California Air Resources Board)
Special thank you to Economics Department Chair, Steve Hackett.
Assembly Bill 32 Overview. California Air Resources Board. 2014. Date Accessed: 15 March, 2015.
Cap and Trade. . California Air Resources Board. 2014. Date Accessed: 7 April 2015
Carbon Market California. Environmental Defense Fund. 2014. Date Accessed: 15 March, 2015
Climate Change and Health. World Health Organization. 2014. Date accessed: 20 March, 2015.
Hackett, S.C. (2011). Environmental and Natural Resource Economics: Theory, Policy and the Sustainable Society. (4th
ed.) Armonk, N.Y., &London, England: M.E.
Sharpe.
When it is found that certain industries are creating negative byproducts which are
harmful or disruptive to society, (like GHG emissions) regulation must occur to
stop the industry’s improper conduct. When the government must be the one to
enact these regulations, they should design the regulatory scheme in such a way
that it effectively disrupts the negative behaviors while creating as little as
possible added cost to both the producer and consumer. (Hackett 2011)
AB-32 has adopted several different forms of regulation in its efforts to reduce
GHG emissions. Different types of regulation are to be phased in at different
times, effecting different sectors of the economy. Our focus is on the Air
Resources Board’s creation of a cap and trade market for GHG’s.
Cap and trade incorporates both command and control and incentive based
regulation to provide the best possible outcome for both producers and consumers.
Under the program, pollution is first made scarce (and therefore valuable) by
putting a cap on emissions. The second
part of this dual system is the ability for
firms to trade pollution allowances, which
ensures that compliance costs will be
reduced, while environmental improvements
are made.
This is done by firms trading allowances
based on their marginal pollution abatement
costs. If a firm has dirtier (an generally older)
technology and equipment, its pollution
abatement costs are going to be higher than a
firm with cleaner technology and equipment.
The market price of allowances will determine whether or not a firm will purchase
or sell their allowances to pollute above the
set cap. A firm with high abatement costs will
sell allowances, while a firm with low
abatement costs will purchase more
allowances. This creates a market for trading
emissions allowances. (Hackett 2011)
AB 32 includes the major GHGs and groups of
GHGs that are being emitted into the atmosphere.
These gases include:
1. Carbon dioxide
2. Methane
3. Nitrous oxide
4. Hydrofluorocarbons
5. Perfluorocarbons
6. Sulfur hexafluoride
7. Nitrogen trifluoride
AUTHORS SAM AND ALEXA ARE CURRENTLY
IMPLEMENTING A RETIREMENT PROGRAM AT HUBOLDT
STATE UNIVERSITY TO BE COMPLETED SPRING 2015.
The Air Resources Board acknowledges that AB-32 is necessary because:
• “Global warming poses a serious threat to the economic well-being, public health,
natural resources, and the environment of California. The potential adverse impacts
of global warming include … air quality problems, a reduction in the quality and
supply of water…a rise in sea levels resulting in the displacement of thousands of
coastal businesses and residences, damage to marine ecosystems and the natural
environment, and an increase in …human health-related problems.” (California Air
Resources Board)
• “Global warming will have detrimental effects on some of California’s largest
industries, including agriculture, wine, tourism, skiing, recreational and commercial
fishing, and forestry. It will also increase the strain on electricity supplies necessary
to meet the demand for summer air-conditioning in the hottest parts of the state.”
(California Air Resources Board)
According to the World Health Organization, climate change heavily impacts
various determinants of health such as clean air and safe drinking water.
Furthermore , between 2030 and 2050 the WTO expects climate change to be the
cause of an estimated 250,000 deaths per year and the direct damage costs to health
is estimated to be between US$ 2-4 billion/year by 2030. (World Health
Organization)
California, and now Quebec are effectively
driving social change concentrated on reducing
GHG pollution through the implementation of
AB-32 and the cap and trade program.
Hopefully the rest of the U.S. will soon follow
suite.
The Air Resources Board holds 4 quarterly allowance auctions. The auction sales consist of two
different types of allowances, referred to as “current vintage” allowances and “future vintage”
allowances. Current vintage allowances can be used to cover emissions starting in the year they are
sold and thereafter. Future vintage allowances can only be used three years after they are sold.
Auction participants submit bids for both types of allowances at the same time. There is a “floor
price” or minimum amount that an entity can bid. This price increases by 5% plus the rate of
inflation each year. (Carbon Market California)
The CITSS (Compliance Instrument Tracking System Service) oversees the processes of trading and
surrendering allowances.CITSS also has a jurisdictional allowance retirement account which can be
used to permanently lower the emissions cap by purchasing allowances to pollute and not using them
by transferring them to the retirement account. By purchasing and retiring allowances, the cap is
permanently lowered, which decreases the aggregate GHG emissions in California. (California Air
Resources Board)
Information for the number of allowances in all accounts between 2014 Quarter 2 and 2015 Quarter 1
can be found in the Compliance Instrument Report on the ARB website. The total number of
allowances currently (Quarter 1 in 2015) is 2,933,628,346, with 42,898,646 allowances in retirement.
Using this data, less than 1.5% of total allowances have been retired. (Air Resource Board: Cap and
Trade)
There are two ways an account can be transferred to the retirement account. Through voluntary
retirement or with offset projects, which, in California, include the U.S. Forest Project, Urban Forest
Project, Ozone Depleting Substances, Livestock Manure Digesters, and Mine Methane Capture.
Most of the volume (about 96%) of the allowances in retirement is through voluntary retirement,
with only about 4% of the allowances retired through offset projects. (Air Resources Board: Cap and
Trade)
PROGRAM SUCCESS: JOBS & THE ENVIRONMENT
One fear when the ARB first enacted the cap-and-trade programs was that the added cost to the
regulated industries, though minmalized through the nature of cap and trade, would cause state-wide
job loss. In fact, as is depicted in the graph below the state’s economy is thriving, and the number of
jobs is growing, both growth rates exceeding that of the rest of the country. This is especially true in
the green tech sector, where the job growth rate, at five percent, was even higher than the statewide
average.” (Carbon Market California)
Data has already been published by the ARB for
2013 and 2014. The first allowance surrender
was met with 100% compliance and emissions
that are subject to the cap are decreasing.
“Companies covered under California’s cap-and-
trade program reduced their 2013 emissions by
3.8%, or about 5.53 million metric tons of carbon
dioxide equivalent (MMTCO2e), a level that is
11% below the 2013 cap.” (Carbon Market
California)