Can We Make Energy Bills in California More Equitable Using Cap-and-Trade?
It's getting more expensive to heat and cool your home in California, and lower-income households are most affected. The state's Cap-and-Trade program could help fix that.
Utility energy costs are high in California, and people with lower incomes are disproportionately heavily burdened when utility rates increase. Energy costs that can be high enough to make heating or cooling a home unaffordable, combined with rising summer temperatures and extreme weather events that can make homes dangerous to occupy without heating and cooling, threaten to have serious negative impacts on public health. This is particularly true for lower-income households in hot areas of California during the summer months, when utility customers in hotter areas can face monthly bills hundreds of dollars higher than those of customers in cooler areas. Addressing this issue will be crucial to the success of California’s plan to transition toward the greater use of clean energy.
One tool that California could use to improve energy affordability is the California Climate Credit. The Climate Credit was created as part of the state’s Cap-and-Trade program, which sets a limit on total greenhouse gas emissions and allows businesses that cause emissions, like utilities, to buy and sell emissions “allowances” that can be used to meet their obligations within this overall limit. A portion of the proceeds from utility sales of allowances under this program is returned directly to customers in the form of the Climate Credit, which is distributed twice a year to residential customers of participating utilities in the form of a credit on their energy bill.
The dollar amount of the Climate Credit that utility customers see on their bill depends on which utility serves them and how much the allowances are worth. However, each household with a residential account under a given utility receives the same dollar amount per Climate Credit, regardless of factors like how high their bill is or how much energy they used over the relevant time period. Each customer also receives the same dollar amount regardless of their household income level and whether they’re enrolled in affordability assistance programs like the California Alternate Rates for Energy (CARE) plan.
One way that California could make energy bills more affordable and equitable is by allocating a greater percentage of the money that is returned directly to residential customers under the Climate Credit to lower-income households, so that these customers receive a greater reduction on their bill amount than higher-income customers. This would be one way to address the equity problem of higher utility rates tending to have greater negative impacts on lower-income households than higher-income ones. The credit allocation could also potentially be shifted toward lower-income households in hotter areas, because these customers are especially likely to be burdened by high bills.
The state could also reduce rate impacts on lower-income customers by changing when the Climate Credit is distributed to them. In particular, electric utilities could apply the bill credit to these customers in summer months, when electricity use tends to be higher due to greater need for cooling, rather than in April and October as it is currently scheduled. This would reduce the spikes in bill amounts that otherwise occur when demand increases, making it easier for lower-income households to afford electricity when it’s most needed.
Any new approach to the Climate Credit must fall within the legal authority of the California Air Resources Board (CARB), which sets greenhouse gas emissions standards and regulates the sale of allowances, and the California Public Utilities Commission (CPUC), which regulates utilities. Under the Global Warming Solutions Act of 2006, the legal basis for the state’s Cap-and-Trade program, CARB oversees the process by which allowances are bought and sold. However, when it comes to the relevant proceeds of these sales, Public Utility Code § 748.5 directs the CPUC to require that some of these proceeds be “credited directly to the residential, small business, and emissions-intensive trade-exposed retail customers of the electrical corporation,” which is the basis for the Climate Credit.[1]
As part of the rulemaking process which led to the creation of the current Climate Credit, the CPUC reviewed its legal authority under § 748.5, finding that the law “sets a basic framework that must be followed in adopting a GHG allowance revenue distribution methodology; however, it leaves much to [the CPUC’s] discretion, and there are several sources of ambiguity.” The CPUC noted that “aspects left to the discretion of [the CPUC] include determining the methodology for providing a direct return to eligible retail customers,” including how the funds are allocated between different types of customers. In other words, while CARB regulates how sales of allowances are conducted and places restrictions on how the revenue from those sales can be used, the CPUC has a relatively free hand to determine how a legally designated subset of the proceeds of those sales is distributed, including how that money is returned to residential customers as the Climate Credit.
As a matter of policy judgment, CPUC designed the current structure of the Climate Credit—including both the equal allocation of credit across utilities’ residential customers regardless of total energy use and the distribution of the Climate Credit in April and October rather than during months where energy use tends to be higher—in order to limit, not maximize, the effect of the Climate Credit on energy affordability. The CPUC’s reasoning was that higher bills send a signal to customers that encourages them to conserve energy use when demand is elevated. However, as electricity rates continue to rise far above the social marginal cost of electricity—in large part due to factors like increased utility investment in wildfire mitigation that did not exist at the time of the original rulemaking—customers’ bills are becoming so high that the benefits of this signal are outweighed by adverse impacts on lower-income households.
Under existing law, the CPUC has broad discretion in implementing the Climate Credit, and could choose as a matter of policy to adjust the distribution and timing of Climate Credit allocations in order to address the equity concerns raised by increasing rates, as well as the disproportionate impact these high rates have on lower-income households in hotter parts of California. To take one recent example, the CPUC temporarily changed the schedule of Climate Credit allocations in 2023 to respond to spikes in natural gas prices that threatened to make heating unaffordable during the winter. The CPUC could similarly initiate a rulemaking process to update the Climate Credit in keeping with its policy objective of allocating funds from the Cap-and-Trade program in a way that reduces “adverse outcomes to low-income households.”
A regulatory update to distribute the Climate Credit differently could help to achieve the CPUC’s goal of preventing adverse outcomes to lower-income households and address the equity issues raised by high energy prices. Shifting the credit’s timing to the summer could help prevent bill spikes, and shifting the credit’s allocation toward customers with lower income levels who are located in hotter regions could help reduce the impact of increasing rates on households that are disproportionately burdened by energy costs.
As a matter of law, the state legislature could also update § 748.5 to provide more clarity about how the CPUC should implement the Climate Credit, as it did when specifying in AB 398 that CARB’s implementation of the Cap-and-Trade program must “ensure that activities undertaken to comply with the regulations do not disproportionately impact low-income communities.” Regardless of which of these methods is used, a new approach to the Climate Credit could be an important step toward ensuring that lower-income households and communities don’t disproportionately bear the burden of California’s energy transition.
Eric Macomber joined the Climate and Energy Policy Program and Stanford Law School as a Wildfire Legal Fellow in September 2022. His work focuses on law and policy issues relating to wildfire and the wildland-urban interface.
[1] No analogous statute exists for natural gas utilities; within the legal framework of the Cap-and-Trade program, the CPUC adopted a mechanism to return allowance revenue to residential natural gas customers which operates similarly to the electric residential Climate Credit.