Key Governance Issues in California's Carbon Cap-and-Trade System

Abstract

As of 2021, 30 emissions trading systems were in force globally, covering 16-17% of global greenhouse gas (GHG) emissions. The finalization of the Paris Agreement rulebook for international cooperation through carbon markets has cleared the way for the expansion of emissions trading and carbon pricing worldwide.

This project is a collaboration among researchers from two major jurisdictions engaged in emissions trading: China – with a rate-based emissions trading system commenced in 2021 that is the world’s largest by emissions covered; and California – which has operated an economy-wide greenhouse gas emissions trading system since 2012.

Researchers at Tsinghua University, the California-China Climate Institute, UCLA School of Law, and Wuhan University convened a series of projects and events to share ideas and best-practices and to discuss ways to improve the design and implementation of emissions trading systems. The accompanying reports, (i) The Theory and Practice of China’s Carbon Emissions Trading System – Key Issues in China’s National ETS and Case Study of Hubei Pilot ETS; and (ii) Key Governance Issues in California’s Carbon Cap-and-Trade System, are outputs of this collaboration. The project also included a series of private dialogues on various aspects of emissions trading system design, including on data quality; compliance; monitoring, reporting, and verification (MRV); auctions; allowance allocation approaches; offsets; and the use of financial instruments in carbon markets.
Our collaboration has been guided by the goal of improving understanding of the respective emissions trading systems in China and California. Moreover, it served to explore ways to improve environmental ambition, to ensure market integrity, and to improve the policy environment for climate action. Key design considerations discussed include, among other things, setting caps and benchmarks at appropriately ambitious levels, utilizing auctions and other measures to create an effective price signal, establishing MRV and enforcement systems to ensure data quality and the integrity of emissions reductions, properly structuring offset programs, and channeling market revenues toward environmental objectives. Our dialogues included invaluable assistance from Chinese and California regulators and researchers involved in the design and operation of emissions trading systems.

As a closing note, we reiterate our firm belief in the importance of continued international collaboration on climate change policy. This work, we hope, will serve to make complex emissions trading systems more transparent to the world and to lay the groundwork for improving the effectiveness of climate change policy and regulation.

Keywords: climate change, California, China, emissions trading, market measures