Learn the whole story behind the state's climate credit program.

A note from Center for Jobs and the Economy President Brooke Armour

There’s been lots of self-congratulations from politicians [[link removed]] about the April Utility Bill Credits. That announcement promises Californians that they should be seeing an average $146 in California Climate Credits showing up on their utility bills this month. But as anyone who tracks electricity cost data will tell you, these climate credits pale in comparison to the policy-driven cost increases residents are seeing in their monthly electric bills. California has rightly adopted a market-based mechanism, Cap-and-Trade, to help meet its climate goals, but its ongoing desire to be first in a race it’s running almost by itself is driving up costs for families and businesses alike.

The Gist

The state’s Cap-and-Trade Program is the vehicle that pays for the California Climate Credit Program. California climate policies are driving up the cost of gasoline, electricity, and natural gas prices. Cap-and-Trade itself isn’t the problem; it’s the underlying policies affecting it, including the rapid transition to a single energy use economy, that are driving up costs faster and faster. The Climate Credit covers only about 20% of the higher costs paid by California households as a result of these policy decisions. Lastly, the credit could be $129 higher, but the governor and Legislature raided the fund as part of their “early action budget items.”

The Whole Story

Where do the Climate Credits Come From and How Much Money Is Generated?

The credit comes from a growing tax/fee the state imposes on state energy production and use in California . Companies can meet their climate emission reduction targets by reducing overall emissions or buying emission credits from the state and from businesses with excess emission reduction using the Cap-and-Trade program. The California Climate Credit is supported by revenues coming from the sale of those credits.

In total, Air Resources Board [[link removed]] data indicates this charge added $7.4 billion in costs in 2023, of which $2.3 billion went to the investor-owned utilities (IOUs), $0.3 billion to the publicly-owned utilities, and $4.7 billion was kept by the state, to be used on programs to reduce greenhouse gas emissions, and help fund high-speed rail. Of this amount, Public Utilities Commission [[link removed]] data shows only an estimated $2.6 billion went back to residential utility customers that year as a credit, with $267 million going to business customers under a similar but much smaller program.

These “Revenues” Are Your Highest-in-the-Nation Gasoline Costs and Electricity Bills

Consumers in California pay most if not all of these added costs either directly as they buy gasoline or pay their utility bills, or indirectly as these costs are embedded into all other prices consumers pay. Directly, the emissions subject to these charges include those produced when someone drives their car or uses natural gas in their hot water heaters, their stoves, or to heat their homes. Companies may be responsible for collecting the funds, but they are based heavily on how much and at what time consumers use the energy they buy. The costs related to those emissions are directly incorporated into the price of gasoline and the rates households pay on their monthly utility bills. Indirectly, every good and service bought by California households relies on energy to produce, transport, store, sell, deliver, and for goods eventually dispose.

In Short, You’re Just Paying Yourself Back…And Only A Fraction of What It Cost You

This credit means taking money from consumers and then giving only a small piece of it back. Utility customers are only getting back a portion of what they are paying out in higher costs. Even using the announcement’s $146 average level, this “credit” barely scratches the steeply rising energy costs households now pay as the result of the state’s energy policies and increasing tax and fee burden on energy use. Again, in 2023, the “credit” paid out an estimated (final numbers are not yet in) $2.6 billion to residential customers in the state. That same year, using US Energy Information Administration data, the difference between the average residential price in California compared to the average in all other states meant California households paid $11.3 billion more for the electricity they used and $1.7 billion more for the natural gas, or a total California energy cost premium of $13.0 billion. The California Climate Credit consequently only covered only 20% of the higher costs paid by California households as the result of state energy, tax, and fee policies, and only a portion of households in the state received even this partial compensation.

Cap-and-Trade is a Victim of The State’s Desire to Be First…No Matter the Cost.

It's important to understand and document these costs as other states and nations are looking to California as they design their own climate change policies. California has made global headlines in announcing policies to combat climate change. Politicians continuously tout how our state is “first” to create goals and mandates to reduce greenhouse gas emissions. However, we’re pushing to be first in a race we’re running alone. No other state or nation has adopted comprehensive regulations, and many, like the UK, who announced similar goals have backed off [[link removed]] (including Scotland, which just announced today [[link removed]] is it backing off its targeted emissions reduction plan), several citing cost to consumers as a driving factor.

California, meanwhile, is charging ahead, with little to no policy adjustments regarding cost, feasibility, or reliability. Instead of addressing the consequences of this rapid transition, the state has instead relied on subsidies, like the California Climate Credit, to paper over the true cost to consumers. This credit may provide some relief to some of all the households in the state now having to deal with steeply rising energy costs. But the full circumstances behind this measure instead illustrate what should be apparent by now—there are real and tangible cost consequences to our first in the nation ambitions. At best, subsidies only provide partial relief and are capable of only benefiting a small portion of California working families who are dealing with the resulting costs every day while they try not to fall behind as those costs continue to climb ever higher. Subsidies at best can provide a bandage for a few. Moreover, while the state has been able to rely on these subsidies in large part thanks to a massive, multi-year budget surplus, revenues decline and growing deficits mean these subsidies are going away or are being significantly reduced, being used instead to backfill state budget shortfalls. Dealing with the core problem, however, means having an honest dialogue on adjusting policies if costs are increasing too quickly. After all, the more we get right, the more we can actually be that leader for other states and nations. Which we hope to be.

Climate Credits Could Be $129 Higher, But Were Redirected to Backfill Budget Shortfalls

These “credits” to consumers could be even higher, but the state is now spending the money on other things. In the just-passed “early action” budget items the governor and Legislature have dipped into the cap-and-trade funds [[link removed]] to backfill general fund spending, to the tune of $1.8 billion. Looking just at this amount, it is enough to give an additional $129 “credit” to every residential electricity customer in the state, not just those in the IOU territories (more on that later). This additional amount would more than double the weighted average electricity credit ($114) being handed out in April to only 40% of electric utility customers in the state.

But There’s More:

Not everybody gets this credit. The credits only go to customers of the IOUs directly under state regulation. Using US Energy Information Administration data, only about 60% of electricity customers in the state are served by the IOUs. About 98% of natural gas customers are served by an IOU, but not every home in the state uses natural gas and even fewer will in the future under currently passed state and local policies. The $146 average combined credit mentioned in the governor’s announcement is not the whole story. The credit amount varies widely by utility and by type of credit. As shown in the following table using the Public Utilities Commission [[link removed]] information, the governor’s announcement covers only the April Electricity credit amount. The same amounts are scheduled for the October credit as well.

Center for Jobs & the Economy

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