California’s New Gold: A Primer on the Use of Allowance Value Created Under the CO2 Cap-and-Trade Program

Abstract

California will enact an economy wide cap-and-trade program on CO2. Estimates of the value of tradable emissions allowances in the first year range from roughly $2.6 to $7.8 billion, when electricity and industry are covered under the program. Those sectors receive most of their allowances for free; electricity sector allowance value is directed to the benefit of ratepayers. In the first year a fraction of allowances, mostly with future year vintage, will be sold through an auction with a value of roughly $0.6 to $1.8 billion. That revenue will be returned to the California economy through appropriation by the legislature. Allowance auction revenue will grow five-fold in 2015 when transportation and natural gas are included. To whom does this revenue belong? This is the key unresolved issue in the design of the California program.

Keywords: cap-and-trade, allocation, auction, Air Resources Board

JEL Classification: Q54, Q58