Cap-and-Trade 101

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What is Cap-and-Trade? 

Cap-and-Trade is a program developed by the California Air Resources Board to reduce greenhouse gas emissions, as required by the Global Warming Solutions Act of 2006 (AB 32). Large companies that emit a certain amount of greenhouse gas (GHG) emissions are assigned a "cap" (limit) on their emissions. Those that exceed their cap must either ratchet down those emissions over time (through improvements to their facilities) OR buy "allowances to pollute" through a quarterly state auction. (Companies that produce less than their allocated GHG emissions can "trade" (selltheir allowances to other companies.) 


How many companies are affected? 

Approximately 350 large facilities statewide are affected, including oil producers, refiners, and electricity power plants.


How much money will be generated by the auctions, and what rules will govern the spending of these funds?


The Legislative Analyst’s Office estimates the quarterly state auctions will raise between $12 and $45 billion by 2020. Auctions to date have yielded $532 million, but this will jump dramatically in 2015 when additional industries are subject to the emissions cap.


Funds from the auctions must be used to further reduce GHG emissions. The California Legislature has identified additional benefits they would like to see achieved with these funds, including: 


  • Job creation

  • Improved public health

  • Lower household housing and transportation costs 

  • Assistance to communities heavily impacted by bad air quality, also known as "disadvantaged communities" or "SB 535 communities" after the legislation by Senator Kevin de Leon. SB 535 requires at least 25 percent of the funds to be used on programs and projects that benefit disadvantaged communities. 


A number of new and innovative GHG-reduction programs are eligible to receive some of these auction proceeds, including a program Housing California helped create and strongly supports: The Transit-Oriented Development Housing Program, which ensures housing is built near convenient, affordable transportation options.