California Air Resources Board

Background

Cost containment is a key consideration in the design of the Cap-and-Trade Program (Program). Key elements of the Program have been designed to optimize cost-effectiveness, including: (1) multi-year compliance periods, which smooth year-to-year variations in emissions levels; (2) allowance banking, subject to strict holding limits, which allows participants to hold allowances and use them for compliance in a later period; (3) limited use of offsets, which offer additional low-cost emissions reduction opportunities; (4) the establishment of an Allowance Price Containment Reserve (Reserve), which allows covered entities access to allowances at set prices as a hedge against higher costs, and (5) the creation of a price ceiling to ensure robust cost containment while delivering the necessary GHG emission reductions.

In 2017, Assembly Bill 398 (AB 398) provided legislative direction to CARB to strengthen key cost containment features of the Cap-and-Trade Program post-2020. Specifically, the Legislature required amendments to the Program that included reducing the offsets limit from 8 percent to 4 percent (starting with 2021 emission, and increasing to 6 percent starting with 2026 emissions), revising the design of the Reserve to implement a 2-tier format, and adding a new price ceiling mechanism within the Program. These legislatively mandated changes were adopted by CARB in 2018 and took effect on January 1, 2021.

Allowance Price Containment Reserve

Under the Cap-and-Trade Program, a certain number of allowances from the cap is set aside each year into an Allowance Price Containment Reserve (Reserve).

When a quarterly auction results in a settlement price greater than or equal to 60% of the lowest Reserve tier price, CARB will offer allowances through a Reserve sale. CARB will also offer a Reserve sale every year immediately preceding the compliance deadline.

During 2021 - 2030, allowances in the Reserve will be offered at two tier prices. Pursuant to section 95913(h)(5) of the Cap-and-Trade Regulation (Regulation), the two tier prices were set at $41.40 and $53.20 in 2021. Both tier prices increase by 5% plus inflation each year pursuant to section 95913(h)(4) of the Regulation. The tier prices since 2021 are provided in the table below. The number of allowances offered at each tier is determined by the Regulation.

Reserve Sale Tier Prices Summary Table

Price Ceiling Sale

If at least one entity does not have sufficient eligible compliance instruments in their holding and compliance accounts, and no allowances remain in the Reserve, CARB may offer an annual price ceiling sale to covered and opt-in covered entities to purchase what they need to meet their compliance obligation due that November.

Pursuant to section 95913(f)(1)(A) of the Regulation, the price of the 2021 price ceiling sale, was USD 65.00 per allowance or price ceiling unit. The price ceiling price increases by 5 percent plus inflation each year. The price of the price ceiling sale since 2021 is provided in the table below.

Price Ceiling Sale Price Summary Table