Abstract
Global climate change has caught the attention of climate scientists, the general public, and public officials over the past forty years. A relatively new policy instrument used to combat climate change and its negative effects is cap-and-trade. In 2006, California passed into law the landmark California Global Warming Solutions Act (AB 32) to reduce statewide greenhouse gas emissions over the 21st Century. The law authorizes the California Air Resources Board to setup and implement a cap-and-trade program intended to reduce greenhouse gas (GHG) emissions by allocating free and auctioning carbon allowances and using cap-and-trade auction revenues to fund programs fulfilling the goals of the California Global Warming Solutions Act. My questions are whether carbon allowances should be allocated freely or purchased at auction and how should California spend cap-and-trade revenues generated from the cap-and-trade auctions to meet the goals of AB 32? I review the relevant literature on auctioning allowances, freely allocating allowances, and free allocation schemes. I detail five potential allocations of cap-and-trade revenues and evaluate them against seven criteria used to judge each revenue allocation. The five spending options include a K-14 energy efficiency program, supplementing funding for the implementation of the Sustainable Communities and Climate Protection Act of 2008, expanding forestry efforts, increasing money to alternative fuel and vehicle efficiency research and development, and creating a Green Bank that finances various energy efficiency and alternative energy programs. The seven evaluative criteria are efficiency, equity, external environmental effect, transparency/ accountability, legality, robustness/improvability, and political acceptability. A review of the literature I determine California should use an initial mix of allocating allowances for free and auctioning allowances that shifts toward an auctioning of allowances over time and the output-based updating allocation scheme is the best way to allocate free allowances. After analyzing the different spending alternatives against the seven criteria, I determine cap-and-trade revenue options should be spent on funding for research and development funding for alternative fuel and vehicle efficiency projects, with secondary emphasis on increased forestry and supplementing funding for the implementation of the Sustainable Communities and Climate Protection Act of 2008.