On April 30, 2025, emLab’s Climate & Energy Director Kyle Meng testified before the California State Assembly's climate budget subcommittee to discuss reauthorization of California's greenhouse gas cap-and-trade program and how the state should navigate decisions on how to spend revenue from that program. Watch Kyle’s presentation or read his prepared statement below.
Transcript:
Good morning. Thank you Chair Bennett and your colleagues on the Budget Committee for the opportunity to speak on the future of California’s cap and trade program and its Greenhouse Gas Reduction Fund.
My name is Kyle Meng. I am an associate professor of economics at the Bren School of Environmental Science and Management and in the Department of Economics at UC Santa Barbara. Much of my academic research is on the effectiveness, efficiency, and equity consequences of climate policies, and in particular the policies here in California.
Between August 2023 to October 2024, I served as the Senior Economist for climate, energy, and environment in the White House Council of Economic Advisers. During that period, I led CEA’s analyses in these areas across a wide range of topics for the Biden Administration.
My research and my time in the White House have given me a deep appreciation for California’s climate policies—especially our cap-and-trade program. I see it as a world-leading example of ambitious, pragmatic, and economically sound climate policy, and often use it as a benchmark for assessing other efforts. Indeed, it became a habit of mine while evaluating climate proposals at the White House to ask: What would a program like California’s cap-and-trade do? And then reverse engineer a solution from there.
California’s cap-and-trade program has two key components: the carbon market and the revenue generated from selling emissions permits. While today’s focus is on permit revenue, it’s important to highlight that it’s the carbon market—and the price it places on pollution—that drives emissions reductions in a cost-effective way. Spending of that revenue is in many ways a secondary benefit, that is separate from the core emissions target.
How should the $8.5 billion in cap-and-trade revenue—roughly half of which supports the Greenhouse Gas Reduction Fund—be used? As an economist, I believe these dollars should be treated no differently than those in the state’s general fund. They should support the state’s highest fiscal priorities, whether that means improving healthcare, expanding public education, investing in housing, cutting taxes. To ensure program durability, spending can also address climate adaptation, such as lowering wildfire risk and extreme heat exposure, and environmental justice concerns.
When it comes to using GGRF to directly cut carbon emissions, there is an important caveat: the funds should target reductions that aren’t already being incentivized by the carbon market. Otherwise, the government risks paying for reductions that would have happened anyway. Instead, there needs to be a clear rationale that it is solving a problem that the carbon market isn’t already doing so.
I can think of two clear examples. The first is investing in promising, nascent carbon reduction technologies that fall outside the cap such as direct air capture.
A second example is when energy prices are too high even after accounting for climate and pollution damages. In most parts of the country, electricity prices need to rise to drive decarbonization. But not in California. Here, retail electricity prices are already too high—sometimes double what would be considered appropriate—and they continue to climb. Importantly, this isn’t due to the cap-and-trade program as generation costs have held relatively steady. Instead, roughly half of the increase in PG&E retail electricity prices since 2018 can be attributed to the increased fixed cost of distribution, which includes spending on wildfire prevention.
This is a market failure that should be corrected. Too high electricity prices are now a major headwind to California’s decarbonization goals, slowing the adoption of EVs, heat pumps, and other electric appliances. Permit revenue can be used to lower retail electricity prices. A forthcoming analysis by the Environmental Markets Lab, my research group at UCSB, finds that the $1.2 billion distributed annually through the California Climate Credit could lower retail electricity prices by 20–35% for low income households served by the state’s three largest utilities. If the credit were applied to all households during the summer months—when electricity bills are at their peak—it could lower retail prices by 10–15% during that period.
In summary, even after a decade in, California’s cap-and-trade program continues to be a climate policy that rises to the challenge. It has helped the state meet its emissions targets to date and will become even more critical as California pursues more ambitious climate goals that demand cost- effective solutions. The program has generated a substantial revenue stream that can support a range of state priorities including energy affordability. This rare combination—driving bold climate action while advancing fiscal priorities— makes a strong case for the program’s reauthorization and affirms its value as a model for climate policy design moving forward.
Video from the full hearing can be found here.
