With the passage of AB 197 yesterday, it’s easy to assume that the future of cap-and-trade may be gloomy beyond 2020.  The program relies on legislative authorization via AB 32, which expires in 2020 (although arguably does not preclude extension beyond 2020).  But AB 197 now specifically directs the California Air Resources Board to prioritize:

(a) Emission reduction rules and regulations that result in direct emission reductions at large stationary sources of greenhouse gas emissions sources and direct emission reductions from mobile sources.

(b) Emission reduction rules and regulations that result in direct emission reductions from sources other than those specified in subdivision (a).

Ann Carlson at Legal Planet asks the question whether or not this spells the end of cap-and-trade.  The answer may be quite complicated and will probably land the agency in court to resolve either way, as Ann discusses:

First, what does it mean to “prioritize” direct emission reductions?  Does the language require ARB to impose such reductions? Or only consider them in conjunction with other considerations? What happens, for example, if direct emissions reductions are more expensive than reductions achieved through cap and trade even taking into account the social costs of emissions as required?

If the Air Resources Board leadership is committed to keeping cap-and-trade alive beyond 2020, which it appears they are, then my guess is they have enough wiggle room and deference to do so, once they undertake a proper analysis of the various options on any given issue before them.

But the new language in AB 197 will certainly provide fodder for cap-and-trade critics to take the agency to court over any decisions privileging that program over direct command-and-control approaches. So in that respect, AB 197 only adds further uncertainty to the program after 2020.

The issue does not not need to be solved right away, as cap-and-trade will continue through 2020.  But the lingering doubts are apparently undermining the auctions for allowances, leading to low prices and uptake.  And industry will not want to continue indefinitely with so much uncertainty in the short term.  Hence their motivation to encourage a legislative fix as soon as possible.

2017 should be an interesting year for cap-and-trade.