Cap and Trade Program


You have likely been hearing a lot lately about "Cap and Trade." You may even have heard about some customers in PG&E territory getting a "climate credit" on their electric bills. This is all related to a California state initiative to reduce greenhouse gas (GHG) emissions through auctions of "allowances." The following summary will help you understand what cap and trade is all about and how it impacts the community-owned utilities in Palo Alto.  

What is "Cap and Trade"?

The Cap and Trade Program is a central element of the California Global Warming Solutions Act or AB 32, and covers major sources of GHG emissions in the state such as refineries, power plants, industrial facilities and transportation fuels. Under cap and trade, the state sets an overall limit or "cap" (which declines over time) on GHG emissions. Entities subject to the cap are able to trade permits (allowances) to emit GHGs. Each allowance is a permit to emit a metric ton of carbon dioxide (or an equivalent amount of other GHGs). The net result of the declining cap is emissions for the state as a whole will be reduced over time. 

Is Palo Alto involved in the Cap and Trade program?

The City of Palo Alto Utilities (CPAU) is affected in two ways.

  1. As of 2013, the city's electric utility, like all California electric utilities, began facing higher energy costs when purchasing "brown power," generated using fossil fuels. To supplement its hydro and renewable energy supplies, CPAU does purchase some brown power along with Renewable Energy Certificates (RECs) to ensure that all electric supplies are carbon neutral. In recognition of higher costs incurred by electric utilities, the State allocates free allowances to be used to relieve the impact on electric ratepayers. CPAU is required to sell those allowances and use the proceeds for the benefit of CPAU's electric customers.
  2. As of 2015, the city’s gas utility is required to purchase allowances for the carbon emissions associated with the gas it delivers to customers.  As with the electric utility, the gas utility receives free allowances. Unlike the electric utility, the gas utility must both sell some of the allowances and purchase enough allowances to cover the GHGs resulting from natural gas used by CPAU's gas customers. Proceeds from the sale of allowances must be used to the benefit of CPAU's gas ratepayers and must be consistent with the goal of reducing GHGs.

What will CPAU do with the money made by selling its allowances?

For CPAU's electric customers, the City Council approved the following uses:

  • Purchases in renewable resources
  • Keeping our electric resource mix 100% carbon neutral
  • Programs and rebates to improve energy efficiency
  • Rebates to electric ratepayers

For CPAU's gas customers, the City Council approved the following uses:

  • Programs and rebated to improve energy efficiency
  • Purchases of, or investment in, biogas
  • Investment in carbon reduction activities including projects to reduce emissions caused by leaks
  • Rebates to gas payers

Read the full staff report on the use of allowance proceeds.