Carbon Pricing at the State Level: A “Helpful Adjunct?”

This article was co-authored by Naomi Shimberg and Jacob Miller, as contributing writers for Climate XChange. It’s based on the latest episode of Pricing Nature, a new podcast on carbon pricing and climate policy from the Center for Business and the Environment at Yale, the Yale Carbon Charge, and the World Bank Carbon Pricing Leadership Coalition. To hear the full episode visit

Advocates in Washington State have been trying to pass a carbon price for years. How were they able to succeed this time around? 

Climate XChange has been following Washington State’s attempts to price carbon for a while, and now those efforts have come to fruition. On May 17th, Governor Jay Inslee signed the Climate Commitment Act (CCA) into law. The CCA is an economy-wide cap-and-invest bill that will reduce greenhouse gas emissions 95 percent below 1990 levels by 2050 and generate over $4 billion in revenue.

In the context of the larger progressive climate policy conversation, Washington State provides an example of how carbon pricing can be — in the words of David Roberts — a “helpful adjunct” to other policy strategies. Under Governor Inslee, the Washington State legislature has also passed a broad suite of climate policies, including a clean electricity standard, an energy efficiency standard for commercial buildings, investments in vehicle electrification, and a clean fuel standard. The cap-and-invest program will complement this broader suite of regulations and investment policies.

The Climate Commitment Act (CCA) is chock-full of caveats, earmarking, and supplemental provisions aimed to guarantee in-state emissions reductions and to address environmental justice concerns, evidence of a much longer narrative around carbon pricing in the United States. 

We examined this narrative in the latest episode of our podcast, Pricing Nature. We spoke with Michael Méndez (Assistant Professor at UC-Irvine), Danny Cullenward (energy economist and lawyer at CarbonPlan and Stanford), Keya Chatterjee (Executive Director of the U.S. Climate Action Network), and David Roberts (author of the Volts newsletter) about progressive critiques of carbon pricing.

Progressives’ criticisms of carbon pricing shaped the Washington State cap-and-invest bill. Much of this criticism is linked to California’s cap-and-trade program. In fact, Washington State Senator Reuven Carlyle (D-Seattle) told the Seattle Times that the bill was specifically designed to overcome the weaknesses of the California program:

“I had a checklist, and I made sure in my own head that we addressed these criticisms and weaknesses of the California bill, and not just danced around them. This was the central guiding principle of our work, and I never deviated from it.”

What Went Wrong In California?

When we asked Michael Méndez this question, he talked about the state government’s failure to include frontline community members in the design of the cap-and-trade program. Méndez worked as a consultant to the California state legislature and has served as an advisor to the California Air Resources Board, which is the agency that oversees the cap-and-trade system. He talked about how many environmental justice groups were “essentially left out” of the regulatory process, despite the existence of an Environmental Justice Advisory Committee:

“In 2008, there was not one single person of color on that nine member [California Air Resources] board. So this perspective of environmental justice was always bulldozed over, ignored, and not dealt with appropriately.”

In 2009, seven of the eleven members of the Environmental Justice Advisory Committee joined a lawsuit against the Air Resources Board. They charged that the board wasn’t taking their feedback seriously. 

But what was their feedback about? The Environmental Justice Advisory Committee alleged that the state had violated substantive aspects of the legislation that governed the cap-and-trade program, relating to environmental justice and procedural requirements. They had serious concerns about the impact of the cap-and-trade program at the local level. While greenhouse gas emissions are a global problem, emitting greenhouse gases means emitting other co-pollutants at the source, which have local, public health impacts, most often for low-income communities and communities of color. 

Several recent papers (see Grainger and Ruangmas, 2017; Cushing et al., 2018; Mansur and Sheriff, 2019; Meng and Hernandez-Cortez, 2021) assess the impact of California’s cap-and-trade program on local pollution hotspots. Though the bulk of the academic evidence suggests that emissions trading programs in California have delivered equal or greater air quality benefits to disadvantaged communities, it’s difficult to isolate a direct causal link between the cap-and-trade program and changes in local emissions. The cap-and-trade program began at the same time as several other policy changes, so it’s hard to discern how much emissions were reduced as a result of each specific policy. In addition, it’s challenging to model how air pollution is distributed from big emitters, especially at the neighborhood level, which is where these health effects come into play. For this reason, Fowlie et al. (2020) note that the academic evidence does not fully address environmental justice concerns about inequities in the distribution of pollution across neighborhoods.

Overallocation And Banking

In addition to questioning the ability of California’s cap-and-trade program to reduce local emissions, economists and advocates are concerned about the program’s ability to achieve its overall emissions targets. Danny Cullenward, the California Senate’s appointee on the Independent Emissions Market Advisory Committee, said this is primarily a result of overallocation:

“The primary issue, which you see time and time again in cap and trade programs around the world is a persistent, excess supply of compliance instruments. It’s basically referring to a persistent condition where the supply of allowances in the cap and trade program exceeds demand for those allowances. And if the supply demand is out of balance, you’ll have low market prices and you’ll have limited emission reductions.”

Not only will overallocation cause low prices in the short term, prices have a risk of staying low in the long term. California’s cap-and-trade system allows for “banking,” where a regulated entity can save their unused permits for future years. In a cap-and-trade system suffering from overallocation, there is a high volume of unused, bankable allowances. Cullenward says that these banked allowances could present a big problem for the cap-and-trade program in the next decade. Companies could dip into their banked allowances to continue their business-as-usual emissions. 

The EU Emissions Trading System has faced similar challenges due to overallocation. In 2014, the European Commission postponed the auction of 900 million allowances in an effort to temporarily drive up demand for allowances. This strategy is known as “back-loading.” Instead of being auctioned in 2019-2020 as originally planned, however, these 900 million allowances have been moved to the Market Stability Reserve, a pool of allowances that can be injected back into the market should prices deviate from their expected range. 

This back-loading strategy could increase demand should the California cap-and-trade system become overwhelmed by overallocation. However, the California Air Resources Board has not taken any steps to change allowance supply or banking rules, despite urging from legislative leaders (see Independent Emissions Market Advisory Committee Annual Report, Appendix A).

The challenges of overallocation and banking, combined with concerns around environmental justice, have led to a general skepticism around carbon pricing and an identification of several areas for improvement, which the Washington cap-and-trade program aims to overcome.

For example, the law contains a number of provisions meant to address the environmental justice concerns present in California. Some notable provisions specifically target local air pollution by identifying overburdened communities and setting enforceable emission reduction targets for “high priority emitters” in those communities. The CCA also dedicates a substantial portion of auction revenues to a newly formed Air Quality and Health Disparities Account, which is dedicated to improving air quality and reducing health disparities in overburdened communities. 

In addition, the CCA sets long-term emissions caps aimed to reduce statewide greenhouse gas emissions to 95 percent below 1990 levels by 2050. These long-term mechanisms are critical for keeping carbon prices high and subsequently driving down emissions across the economy. Finally, the CCA contains strict rules around the use of offsets, requiring a majority of submitted offsets to provide in-state emissions reductions.

A Philosophical Opposition To Market-based Mechanisms 

We spoke with Keya Chatterjee to understand how carbon pricing programs like that of California and Washington fit into progressive climate policy platforms. Chatterjee leads the U.S. Climate Action Network (USCAN), which is composed of 195 organizations working to combat climate change. In May 2020, USCAN published the Vision for Equitable Climate Action, a platform created to highlight ambitious climate policy proposals that focus on justice. 

Many of the issues with California’s cap-and-trade program — and the issues that Washington’s program aims to avoid — are clearly stated in Vision for Equitable Climate Action, which contains a section on market-based climate policy.

But one thing she said to us is not in the document at all:

“Particularly in many Indigenous cultures, there’s a philosophical opposition to the idea that you can give money to pollute. You can give money and continue to do something wrong as long as you pay to do that thing. And that philosophical opposition is almost the most insurmountable thing and can’t really be addressed by design.”

This philosophical opposition played a crucial role in the creation of USCAN’s Vision for Equitable Climate Action:

“There’s just like one side that’s like, ‘No. I’m an economist. This is the most elegant solution…’ And on the other side you have, ‘This is morally wrong. I’m not okay with this…’ And what we ended up with was the list of problems of what’s in there.”

This type of moral opposition to market-based mechanisms has significantly shifted the national climate policy conversation. For decades, carbon pricing was the primary climate policy proposal in the United States, but no longer. Journalist David Roberts says that the Republican Party has shied away from climate policy nearly entirely, while the Democratic Party has embraced Green New Deal-style legislation: 

“I would say that the spirit of the [Green] New Deal and the core of the Green New Deal went on to kind of inform all policy development on the left on climate change.”

In an article for Vox, Roberts breaks down today’s Democratic climate legislation into three themes, each of which is articulated in the original Green New Deal: standards, investments, and justice. The left has embraced a climate policy platform of sector-specific standards and large investments in infrastructure that create high quality jobs, drive economic decarbonization efforts, and center equity and justice.

Standards, Investments, and Justice

Roberts noted that carbon pricing is a blunt tool for reducing emissions in a politically and technologically diverse range of sectors, in contrast to sector-specific standards. He reiterated much of the theory in Making Climate Policy Work, by Danny Cullenward and David Victor. 

Chatterjee highlighted that when it comes to major investments, progressives favor funding those investments by raising the corporate tax rate or creating a wealth tax. She said that funding investments with carbon pricing revenue would shift the burden onto all taxpayers: 

“We have massive income inequality in this country. We have massive racial injustice. We have a huge wealth gap between black and white people in this country, a massive wealth gap. There is nothing that we should be doing that puts any additional burden on people who have less. It should be quite the opposite.”

Finally, both Chatterjee and Roberts emphasized the importance of justice in the Democratic climate policy platform. While justice as an umbrella term has many meanings, one of its integral components is “procedural justice,” or fairness in decision-making processes. Lack of procedural justice was one of the most important criticisms of California’s cap-and-trade system. According to Méndez, the events in California have led to institutional shifts across the country to center environmental justice groups in the climate policy design process. 

“We see these [environmental justice] coalitions advocating to be appointed by the Governor and the Speaker and the Senate Pro Temp. We see that now happening in the Biden administration.” 

One prominent example came in 2020, when Mary Nichols (then Chair of the California Air Resources Board) was considered a top pick for EPA administrator under the Biden Administration. She wasn’t chosen, largely because of a coordinated response from California’s environmental justice community. Environmental justice advocates released a letter opposing Nichols’ nomination, on the grounds that she had disregarded the recommendations of the Environmental Justice Advisory Committee and implemented a system — cap-and-trade — that disproportionately burdened frontline communities with toxic co-pollutants. 

The growing influence of environmental justice is visible in Washington State as well. On the same day that Governor Inslee signed the Climate Commitment Act into law, he signed the Healthy Environmental for All (HEAL) Act

The HEAL Act establishes a state environmental justice council and requires state agencies to identify areas where they can better serve overburdened communities. Though the CCA alone strives to center justice, it also offers a glimpse of how carbon pricing might complement other policies to motivate a shift towards a clean energy economy and sustainable future.

Featured Image: Speech bubble graphic courtesy of Pricing Nature. Background photo by Pavł Polø via Unsplash. Design by Amanda Griffiths, Climate XChange.