Carbon Pricing, Environmental Justice, Compromise

Carbon pricing in the Golden State is getting an update.

As climate change gets scarier, the need for dramatic GHG reductions becomes clearer. Here in California, we’re realizing just how challenging this is going to be.

We need a well-functioning carbon market to help us manage the costs of meeting our increasingly ambitious GHG emissions reduction targets.  Ensuring that California’s cap-and-trade program is up to this task will require market design updates and a reckoning with some issues that have dogged the carbon market for years.

One enduring concern is that the carbon market will fail to deliver enough environmental quality improvements to disadvantaged communities. 

Economists (including me) have argued that carbon pricing is not well-suited to addressing local pollution problems. In fact, I can show on my whiteboard that the first-best way to mitigate local pollution involves targeting these pollutants directly.  

But climate policy realities are more complicated and fraught than problems I can solve on my whiteboard. Decades of regulations targeting local air pollution directly have failed to eliminate local pollution exposure inequities. Frustrated environmental justice advocates are looking for all opportunities to improve conditions in their communities.  

Against this backdrop, California’s cap-and-trade program could be modified to ensure that pollution reductions happen in California’s most disadvantaged communities. The Environmental Justice Advisory Committee (EJAC) has asked for market reforms along these lines. 

Economists will be concerned that limiting carbon market flexibility will increase costs. EJ advocates will be concerned about the distributional implications of relying on markets to coordinate GHG abatement efforts.  Both concerns will be critical to consider as California updates its cap-and-trade program.

What does climate policy have to do with local air pollution?

GHG emissions are accelerating global climate change. But GHG emissions are not causing local air pollution. So.. you might be wondering … why are EJ advocates so concerned about carbon market outcomes?!

The graphic below plots changes in GHG emissions and two “criteria” pollutants that are major contributors to local air pollution problems. Each dot represents a facility that has been reporting emissions in California over the eight years following the introduction of the GHG cap-and-trade program. 

The picture shows that reductions in GHG emissions are associated with reductions in criteria pollutants on average, but this relationship is really noisy.  For 30% of facilities, reductions in GHG emissions are associated with increases in SO2 emissions (top left). In the lower right quadrant, 17% of sources increased GHG emissions while decreasing criteria emissions over this period. 

This picture helps to illustrate why local air pollution and GHGs should ideally be addressed separately. Regulations designed to reduce GHGs will impact local air pollution indirectly and imperfectly. It’s worth noting, however,  that carbon market revenues can be used to address local air pollution directly. Under AB617 and SB535,  a significant share of GHG market revenues are used to fund investments that improve environmental conditions in disadvantaged communities.

All that said, we’ve been making these fight-local-pollution-separately arguments for over a decade…and local pollution inequities persist in some communities.  If my kids were being disproportionately exposed to harmful pollution every day, I too would be looking for every opportunity to make things better.

GHG Trading Limits

The California Environmental Justice Advisory Committee (EJAC) is advocating for carbon market reforms that would ensure that GHG emissions at all facilities in disadvantaged communities (DACs) fall at least as fast as the state average. Our 2022 IEMAC report starts to think about how safeguards along these lines might be implemented via changes to carbon market rules. 

A recent report by RFF researchers Dallas Burtraw and Nick Roy studies one possible approach in detail. They consider using facility-specific caps to ensure GHG emissions decline as rapidly at regulated DAC sources as the system-wide cap. Dallas and Nick look retrospectively at how emissions outcomes in California’s carbon market might have been different had we imposed these facility-specific permit “trading limits ” from the outset. Here are three insights from their thought-provoking work:

• Between 2013-2020, GHG emissions at regulated DAC facilities fell by 21 percent, compared with 13.8 percent at facilities outside those communities. This is consistent with prior research which has found that  California’s GHG trading program has delivered equal or greater emissions reductions to disadvantaged areas on average (see here and here  and here for recent studies. See here for a related comment and response).

Notably, GHG reduction rates vary a lot across sectors. This implies that facility-specific caps would have been binding at some facilities in some sectors.

• The authors also look at criteria pollutants over this time period. Across the board, cumulative emissions in disadvantaged communities have decreased more quickly than in other communities. This is good news and consistent with other research that documents narrowing air pollution exposure gaps.

• Conditional on some simplifying assumptions (explained in the paper), these authors estimate that, had facility-specific caps been part of the original market design, we would have seen approximately 2% percent less NOx and SO2 in DACs over the 2013-2020 period. They estimate a relatively small (~3 percent) increase in the GHG market price.

These results suggest that facility-specific caps would have delivered air quality improvements to some DAC communities without significantly increasing overall costs.  It is important to keep in mind, however,  that this report is looking in the rearview mirror.  Looking ahead, we will need a more stringent cap to meet our future GHG emissions reduction targets. In a tighter carbon market, source-specific trading limits could have more significant effects on emissions, emissions leakage, and abatement costs. 

Better safeguard than sorry?

Market reforms that prioritize GHG emissions reductions in disadvantaged communities could mitigate pollution exposure inequities (albeit indirectly), help build consensus around California’s GHG cap-and-trade program reforms, and facilitate linkages with other jurisdictions. For example, Washington State’s GHG trading program stipulates that linkages should not have negative effects on highly impacted communities in any jurisdiction with which it links.

These benefits are important. But they could come at a significant cost if additional GHG reductions required at DAC facilities are significantly more costly than GHG abatement opportunities available elsewhere. Depending on how they are designed, trading limits could interact with the allowance price containment reserves in unintended ways. 

As California’s GHG reduction targets get more ambitious, we need to balance equity, fairness, and cost containment concerns all at the same time. Not an easy balancing act. But one that California needs to negotiate carefully in the months ahead. 

I don’t speak for my IEMAC colleagues or EJAC, but I have learned a lot from them.  Some of their ideas are reflected in this blog, but all opinions are mine alone.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Fowlie, Meredith, “Carbon Pricing, Environmental Justice, Compromise”, Energy Institute Blog,  UC Berkeley, August 7, 2023, https://energyathaas.wordpress.com/2023/08/07/carbon-pricing-environmental-justice-compromise/