Our paper analyzes how the California state constitution constraints the future of carbon pricing in state climate policy. We find that extending the carbon market's authority after 2020 while retaining collection of revenue from government-run allowance auctions likely requires a 2/3 legislative supermajority under California's Proposition 26. Simple majority legislative strategies may be possible, but present both novel legal risks and significant policy consequences, such as precluding the collection of government revenue via 100% free allocation of allowances.
In addition to speaking to the live issue of the role of carbon pricing in California's post-2020 climate policy strategy—see this new comment letter from me and Michael Wara on the California Air Resources Board's 2030 scoping plan process—our paper highlights how carbon pricing is critical to the future of western electricity markets.
As Michael and I have pointed out repeatedly (see here and here), plans to expand California's wholesale electricity market (CAISO) depend on California employing a state-level carbon price to ensure that only low-carbon resources are dispatched to serve California customers. That approach is consistent with the way CAISO operates its current Energy Imbalance Market (EIM), which applies California's secondary carbon market price to out-of-state power plants that wish to sell to California customers.
That basic market design is set to continue in any expanded CAISO energy markets. After several rounds of public comment, CAISO has prepared a "straw proposal" for how the EIM and an expanded CAISO energy market would operate. As with the EIM, the expanded energy market would apply California's state-level carbon price to out-of-state resources that are deemed to be dispatched to serve California customers.
Whether and how to expand CAISO's energy markets is a complicated subject, but one thing should be clear: California needs to have the legal authority to impose a carbon price on imported electricity in order to make this market design concept work. In my view, however, that authority almost certainly expires at the end of 2020 without legislative re-authorization—see a comment letter from me and Michael Wara here for a full analysis.
If California wants to expand CAISO's energy markets, state policymakers will first need to extend carbon pricing authority beyond 2020. Absent a carbon price, there is no way to ensure that a regional electricity market including states whose energy and climate policy priorities could not be more different will not undermine California's policy goals. And as Andy and I describe in detail in our new paper, achieving that post-2020 carbon pricing authority likely requires a 2/3 legislative supermajority.
Thanks to ELJ Editor-in-Chief Bob Fleishman for the opportunity to publish with ELJ; to ELJ Articles Editor Kevin Poloncarz for his comprehensive and thoughtful feedback; and to the student editors at the University of Tulsa College of Law for their excellent assistance.