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California Proposes Ambitious New Cap-and-Trade Program

The legislation would set one of the highest prices for carbon in the world.

This week, a California state senator will introduce legislation that would replace the state’s troubled cap-and-trade program, and eventually establish one of the highest prices for carbon dioxide in the world. Around 90 percent of the revenue from the program, which would raise several billion dollars annually and climb steadily over time, would go back to California citizens in the form of a "climate dividend rebate."

The proposal, which will be set forth in an amended version of SB 775, marks the latest effort by the world’s sixth-largest economy to step up as a leader in climate policy, highlighting a path to lower greenhouse gas emissions that other states or nations could follow.

"This new post-2020 cap-and-trade program illustrates the California State Senate’s commitment to expanding California’s clean energy economy, protecting [the] health and welfare of Californians, and lowering pollution in all parts of the state," said Sen. Bob Wieckowski, a Democrat representing part of the Bay Area, during a press conference on Monday afternoon.

Cap-and-trade systems are market-based mechanisms that allow companies to bid on a limited number of allowances for producing greenhouse gases, which tick down over time to lower total emissions. Under the program that first went into effect in 2013, California holds quarterly auctions for large power plants, factories, and fuel distributors with a rising price floor, which currently sits at $13.57 per metric ton. Most of those funds are allocated for green projects in the state.

In its current form, Sen. Wieckowski's proposed system would establish a so-called price collar that sets both a floor and ceiling for the price of a metric ton of carbon dioxide. The price collar would start at $20 and $30 in 2021, rise to $20 and $40 in 2022, and then tick up each subsequent year by $5 and $10, respectively, plus inflation adjustments. The ceiling would immediately be higher than the price of carbon in most European nations, and would quickly exceed the roughly $37 tax proposed in Canada starting in 2022. At some point in the 2030s, assuming no other changes, it would also surpass Sweden’s carbon tax of around $150 per metric ton, which is the most expensive in the world.

California’s existing cap-and-trade system was initially seen as a model for other states. But it’s struggled through a series of challenges, including a California Chamber of Commerce lawsuit arguing that it amounts to an illegal tax, an ongoing debate over whether it has the authority to continue operating past 2020, and low demand amid uncertainties about the system’s future.

The new program should make the auction function more effectively by clearing up the legal standing, eliminating the banking of allocations for use in subsequent years, and providing insight into the price trajectory over time, says Adele Morris, policy director for the climate and energy economics project at the Brookings Institute.

Because it raises revenue, passage of the new measure will require two-thirds majority approval in both branches of California’s legislature. But supporters believe it could pass, as Democrats currently enjoy a slim supermajority in the State Assembly and Senate. In addition, the price ceiling and market mechanisms may help bring along some moderate Republicans, while the direct rebates to consumers could prove popular among voters.

"That's the key to deep decarbonization: making carbon pricing work for everyone," wrote Danny Cullenward, a Stanford lecturer and energy economist who acted as an adviser to Senate leaders on the legislation, in an email interview.

The climate dividend would be given directly to consumers following each quarterly auction, though the exact delivery mechanisms still need to be determined.

The proposal includes other features intended to stabilize the system and make it more politically palatable. It creates, in effect, a border-adjustment tax on carbon-intensive products coming into the state, such as cement and refined metals, helping to ensure California producers aren't placed at a competitive disadvantage to out-of-state businesses. 

It also removes carbon offsets, which allow companies to emit more carbon dioxide if they invest in green projects elsewhere, such as a tree-planting carbon sequestration scheme. Properly accounting for the benefits and costs of such programs has proven challenging, and critics argue it's far more effective to directly incentivize companies to reduce their own pollution.

The cap-and-trade program would also largely lie beyond the reach of federal policy shifts, a crucial consideration as the Trump administration seeks to unravel other mechanisms the state is relying upon to reach its ambitious climate emissions goals, most notably an exemption allowing California to set its own vehicle fuel-efficiency standards.

"While others may be retreating in the fight against climate change, we are sending a clear message that a strong economy and strong climate policies are not mutually exclusive," Sen. Wieckowski said.


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