The effect of cap-and-trade on sectoral emissions: Evidence from California

Abstract

We study the impact of California’s cap-and-trade system on carbon emissions in the electricity and industrial sectors. We use US state-level panel data covering the period 2005–2019 and apply the synthetic control method to construct an optimal counterfactual for per capita emissions in each sector. In our experiment, emissions in the power sector fall below counterfactual emissions by 48%. In the industrial sector, the state’s emissions are 6% higher than those of the synthetic control unit by the end of the observation period. Thus, cap-and-trade failed to deliver decarbonization across both sectors. While the abatement in the power sector was facilitated by complementary policies and driven by a switch from natural gas to renewables, California’s policy mix has disincentivized emission reductions in the industrial sector.