Implications of Policy Interactions for California's Climate Policy

Abstract

California’s Global Warming Solutions Act of 2006 (AB 32) requires that the State lower its greenhouse gas (GHG) emissions to 1990 levels by the year 2020. To achieve this ambitious goal, California’s Air Resources Board (ARB) has developed an AB 32 Scoping Plan that includes multiple policies and programs targeting different sectors and energy uses. Although these diverse policies and programs are typically approached and analyzed as if they were independent of one another, in fact, interactions among these policies and between AB 32 policies and federal policies can have very important consequences for environmental effectiveness as well as economic performance.

Interactions between policies are most problematic when two conditions occur: first, a state policy creates more stringent requirements that overlap with a “broader” state or federal policy (“overlap criteria”); and, second, the broader federal or state policy provides flexibility to meet requirements through adjustments across sectors or states (“flexible policy criteria”). These flexible policies can include quantity-based policies (such as, cap-and-trade) and policies that average performance (such as, renewable portfolio standards or renewable fuel standards.)

In the context of the AB 32 Scoping Plan, two types of interactions pose the greatest concern. The first is the interaction between the GHG cap-and-trade program and other AB 32 policies that regulate sources covered by the cap-and-trade program. For example, emissions from transportation fuel combustion are regulated by both the cap-and-trade program and by the Low Carbon Fuel Standard (LCFS), which mandates reductions in the GHG-intensity of transportation fuels.

When state-level policies overlap with cap-and-trade, the complementary policies will generally fail to create any additional emission reductions. With a binding cap-and-trade system in place, aggregate emissions will equal the cap whether or not complementary policies are implemented. While complementary policies may shift emissions among sources or sectors covered by the cap, aggregate emissions will remain unchanged.