RECALIBRATING CALIFORNIA’S CAP-AND-TRADE PROGRAM TO ACCOUNT FOR OVERSUPPLY

This report by Energy Innovation provides a quantitative analysis of the linked California-Quebec cap-and-trade program, identifying a systemic oversupply of carbon allowances. The author argues that emissions have fallen faster than regulators expected due to successful climate policies, technological innovation, and economic trends. While the program's price floor and holding limits act as stabilizers, the report suggests that the current oversupply has led to undersubscribed auctions. The author proposes four policy reforms—lowering caps, switching to annual compliance, increasing the price floor, and reducing free allowances—to drive more significant emission reductions and provide stable revenue for the Greenhouse Gas Reduction Fund.

• The California-Quebec linked cap-and-trade program has experienced systemic oversupply, with cap levels exceeding actual emissions in every year for which empirical data is available (2013-2015).
• Recent auction results, including sales of only 11 percent in May 2016 and 18 percent in the first auction of 2017, are attributed to oversupply and temporal flexibility in the three-year compliance period, though legal uncertainty from a pending lawsuit also played a role.
• Prospective analysis indicates that between 78% and 86% of all allowances planned for distribution through 2020 will be required for compliance. Under an assumption of 28% free allocation, average auction sales are expected to be between 71% and 81%.
• Estimated revenue for California’s Greenhouse Gas Reduction Fund for the remainder of 2017 through 2020 is projected to range between $7.6 billion and $8.5 billion, depending on the demand scenario.
• The report recommends four specific policy changes to improve the program: lowering emission caps to meet 2030 targets, switching from three-year to annual compliance to stabilize revenue and market information, increasing the price floor, and reducing the number of free allowances given to emitters.
• The author notes that the program's design is more resilient to oversupply than other global markets, such as the EU ETS, because California utilizes a price floor and holding limits to prevent prices from crashing to zero.
• Oversupply is more acute when looking only at the second compliance period (2015-2017); if current trends continue, emitters may need 200 MMT more allowances, but 420 MMT are expected to be offered across the next six auctions.

APA

Busch, C. (2017). RECALIBRATING CALIFORNIA’S CAP-AND-TRADE PROGRAM TO ACCOUNT FOR OVERSUPPLY. Energy Innovation. https://energyinnovation.org/wp-content/uploads/RecalibratingCA_Cap-Trade_2017.pdf

Chicago

Busch, Chris. RECALIBRATING CALIFORNIA’S CAP-AND-TRADE PROGRAM TO ACCOUNT FOR OVERSUPPLY. Energy Innovation, 2017. https://energyinnovation.org/wp-content/uploads/RecalibratingCA_Cap-Trade_2017.pdf.

Wikipedia

{{cite report |last1=Busch |first1=Chris |title=RECALIBRATING CALIFORNIA’S CAP-AND-TRADE PROGRAM TO ACCOUNT FOR OVERSUPPLY |publisher=Energy Innovation |date=March 2017 |url=https://energyinnovation.org/wp-content/uploads/RecalibratingCA_Cap-Trade_2017.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{busch2017recalibrating, author = {Busch, Chris}, title = {{RECALIBRATING CALIFORNIA’S CAP-AND-TRADE PROGRAM TO ACCOUNT FOR OVERSUPPLY}}, institution = {Energy Innovation}, year = {2017}, month = mar, url = {https://energyinnovation.org/wp-content/uploads/RecalibratingCA_Cap-Trade_2017.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }