California, with a population of close to 40 million, is a big player when it comes to confronting climate change. The state’s comprehensive and aggressive policies and programs serve as a model for other states and countries that are making strides towards addressing the climate crisis. In 2006, the state passed the California Global Warming Solutions Act (AB 32), which set ambitious goals for reducing greenhouse gas (GHG) emissions in the state. Two GHG reduction programs to come from AB 32 are Cap-and-Trade and the Low Carbon Fuel Standard, which complement each other and help ensure that California meets its goals for greenhouse gas emission reductions. The California Air Resources Board (CARB), the lead agency for California’s fight against climate change, oversees both the Cap-and-Trade program and the Low Carbon Fuel Standard. CARB also oversees all air pollution control efforts in California including other programs like the Zero-Emission Vehicle program and the Air Quality Improvement Program.
According to CARB, transportation is the largest source of greenhouse gas emissions in the state, at 38 percent of total inventory. The Low Carbon Fuel Standard exclusively covers entities in the transportation sector while the Cap-and-Trade program covers heavily polluting entities in a variety of sectors, including electricity producers, fuel distributors, industrial facilities, transportation, agriculture and forestry. Entities that produce or import fuels, such as oil companies or biofuel producers, could fall within the scope of both California programs.
Graphic: California’s greenhouse gas emissions in 2020 broken out by economic sector
Cap-and-Trade is a market-based policy tool that does not rely on taxpayers to function and is used to reduce greenhouse gas emissions. Cap-and-Trade covers entities that emit 25,000 metric tons or more of carbon dioxide equivalent emissions annually. What does that look like? According to the Environmental Protection Agency (EPA), a metric ton of carbon dioxide (CO₂) is equivalent to 113 gallons of gasoline consumed. California’s Cap-and-Trade program encompasses approximately 450 entities that are accountable for 85% of the state’s greenhouse gas emissions.
Under a cap and trade system, the government sets a limit, or “cap,” on the total amount of greenhouse gas emissions that can be released within a certain time period, typically a year. This cap is then divided into allowances, which are distributed to companies or other entities that emit greenhouse gases. Companies can then buy and sell these allowances on a market, allowing them to trade emissions. Those companies that are able to reduce their emissions below their allotted cap can sell their excess allowances to companies that are not able to meet their emission targets. This creates an incentive for companies to reduce their greenhouse gas emissions and rewards those that are able to do so.
The cap on emissions is gradually reduced over time, and the number of allowances available for purchase is also reduced, creating an incentive for companies to reduce their emissions and invest in cleaner technologies. While fossil fuels are still consumed under the Cap-and-Trade program, the program is not a permit to pollute.
The Low Carbon Fuel Standard (LCFS) is a regulatory tool that requires the reduction of carbon intensity in transportation fuels specifically and does not apply to other industries, such as agriculture or electricity generation. A carbon intensity (CI) benchmark is set at a certain number of grams of carbon dioxide equivalent emitted per megajoule. (gCO2e/MJ). Carbon intensity takes into account the entire life cycle of the fuel, from production to combustion or consumption.
Low carbon fuels below the benchmark generate credits, while fuels above the CI benchmark generate deficits. Credits and deficits are denominated in metric tons of GHG emissions and are transacted on a private market. Regulated entities that produce fuels with higher carbon intensities must purchase these credits every 90 days to continue to operate within the state.
Under the LCFS program, fuel producers and importers are required to meet a decreasing carbon intensity standard over time. They can do this by producing or importing fuels with lower carbon intensity than the standard, or by purchasing credits from other producers or importers who have exceeded the standard. The program also includes provisions to encourage the development of low-carbon fuels, such as hydrogen and electricity.
One of the biggest differences between Cap-and-Trade and the LCFS is that cap-and-trade is truly a market-based policy, meaning market factors alone affect the price of allowances. The government is more hands-on with LCFS, a regulatory policy, and can change credit pricing by changing the benchmark.
In contrast to the LCFS, Cap-and-Trade is specifically designed to create a market for emissions, where companies can buy and sell allowances to emit greenhouse gases. The goal of Cap-and-Trade is to create an economic incentive for companies to reduce their emissions below their allocated cap, whereas the LCFS seeks to incentivize the use of low-carbon fuels in the transportation sector.
In summary, here’s a side-by-side comparison chart of the differences between California’s Cap and Trade program and the Low Carbon Fuel Standard program.
In conclusion, California’s Cap-and-Trade and the Low Carbon Fuel Standard are both essential tools in reducing the state’s greenhouse gas emissions. Cap-and-Trade creates a market for emissions, incentivizing companies to reduce their emissions below their allocated cap, while the LCFS seeks to incentivize the use of low-carbon fuels in the transportation sector.
While Cap-and-Trade is a market-based policy, the government is more hands-on with the LCFS, which is a regulatory policy. Ultimately, both policies complement each other and help ensure that California meets its goals for reducing greenhouse gas emissions. As California continues to lead the way in confronting climate change, other states and countries can look to these programs as a model for creating effective and comprehensive climate policies.