Using California’s cap-and-trade revenue to lower electricity prices

About

California has some of the highest electricity prices in the country. These prices - which are too high even accounting for climate and pollution damages (i.e., social marginal cost) - make it harder for people to afford their energy bills and discourage the switch to cleaner electric options like electric cars, heat pumps, and other appliances. California’s greenhouse gas (GHG) cap-and-trade (C&T) program has been integral to the state achieving its climate goals by inducing cost-effective (and thus affordable) emissions reductions. It has also generated over $50 billion in permit auction revenues since 2013, which can be used to tackle energy affordability through funding direct reductions in retail electricity prices.

With the reauthorization of California’s cap-and-trade program approaching and the Governor’s May 2025 revision of the California state budget, there is an opportunity to reconsider how C&T revenues can be directed to lower electricity prices across the state. 

Approach

We first examine how reallocating the $1.2 billion in C&T funding from the residential California Climate Credit (CCC) program to directly subsidizing retail electricity rates (as opposed to annual payments) could lower prices for PG&E, SCE, and SDG&E customers. This approach is referred to as a volumetric subsidy, where the subsidy lowers the per kWh rate. To understand the impact of this new subsidy design, we use the 2023 retail electricity price and consumption for each utility and determine the corresponding subsidy for reducing electricity prices under each utility’s 2023 CCC budget allocation. Leveraging economic theory, we are able to develop a flexible modeling tool that can be used to explore price reductions for a broad range of budget allocations.

Key findings

We explore three different subsidy designs: (1) a subsidy applied to all households and months, (2) a subsidy applied to all households during the energy intensive summer months, and (3) a subsidy applied to CARE households during all months. Subsidy design 1 is similar to the current annual payments in that it applies to all households, with the budget allocated in terms of volumetric rate reductions rather than as lump-sum payments. We find that:

• Subsidy design 1: funding allocated across all households every month lowers electricity prices by 4-7%.
• Subsidy design 2: funding allocated across all households during summer months when energy demand is greatest lowers electricity prices by 13-19%.
• Subsidy design 3: funding allocated across low-income households, as defined by the California Alternate Rates for Energy (CARE) program, every month lowers electricity prices by 27-44%.

These price reductions would be larger with more funding, either from additional C&T permit revenue or other state funds. They can also target different populations and times of year. Overall, California’s GHG C&T program tackles energy affordability both by offering the most cost-effective way to meet climate goals and by generating revenue to help reduce high electricity prices. 

Team

This work was conducted by Kyle Meng, Director of emLab's Climate & Energy Program, and Shradhey Prasad, a Project Manager and Data Scientist for emLab’s Climate & Energy Program.