State Constitutional Limitations on the Future of California’s Carbon Market 

Andy Coghlan and Danny Cullenward

Working Paper (May 2016); PDF available here

California voters approved Proposition 26 in 2010, amending the state constitution to require a legislative supermajority to raises taxes on any citizen. Proposition 26 strengthened the requirements of Proposition 13, an earlier anti-tax provision that applies to pre-2010 statutory authority, including California’s 2006 climate law, AB 32. Both propositions have important implications for California's carbon market: opponents have challenged the current market’s legality under Proposition 13, whereas any legislation to extend the market beyond 2020 would need to confront the requirements of Proposition 26. As California policymakers begin to plan for deeper greenhouse gas emission reductions beyond the 2020 target established by AB 32, the carbon market’s future is uncertain, with implications that reach beyond state borders. Carbon market prices help determine dispatch order in the California Independent System Operator (CAISO) Energy Imbalance Market and are part of the discussion over whether to expand CAISO’s energy markets. We suggest options for modifying a post-2020 version of California's cap-and-trade system to fit within the constraints of Proposition 13 and 26 using regulatory and legislative approaches, respectively. We conclude with strategic implications for the future of California's climate policy and the role of carbon pricing in western electricity markets.