Rethinking Downstream Regulation: California's Opportunity to Engage Households in Reducing Greenhouse Gases

With the passage of the Global Warming Solutions Act of 2006 (AB32), California has begun an ambitious journey to reduce in-state GHG emissions to 1990 levels by 2020. Under the direction of executive order S-20-06, a mandated Market Advisory Committee (MAC) charged with studying market-based mechanisms to reduce GHG emissions, including cap and trade systems, has recommended taking an “upstream” approach to GHG emissions regulation, arguing that upstream regulation will reduce administrative costs because there are fewer agents. In this paper, we argue that, the total costs to society of a GHG cap and trade scheme can be minimized though downstream regulation, rather than the widely proposed upstream approach. We propose a household carbon trading system with four major components: a state allocation to households, household-to-household trading, households to utility company credit transfers, and utility companies to government credit transfers. The proposed system can also be considered more equitable than carbon taxes and upstream cap and trade systems to control GHG emissions from residential energy use and is consistent with AB32.