California regulators will direct the state’s largest utilities to return 85% of cap-and-trade proceeds to ratepayers. The move, which comes about a month after the successful completion of California’s first carbon allowance auction, aims at offsetting higher electricity costs resulting from the cap-and-trade program, by providing a “climate dividend” on utility bills.

On December 20, 1012, the California Public Utilities Commission (CPUC) unanimously approved a plan to distribute the utility sector’s carbon allowance revenues to ratepayers in the form of a biennial “climate dividend.” The plan directs three major investor-owned utilities – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – to return 85% of proceeds from the sale of carbon allowances to ratepayers as rebates through the life of the cap-and-trade program. The dividend, estimated to range from $20 to $40, will appear as an automatic credit on utility bills every six months starting July 2013. The amount of money that will go to ratepayers in the form of rebates from 2013 through 2020 ranges from $5.7 billion to $22.6 billion.

Leakage-exposed industries, i.e. customers competing with out-of-state companies not held accountable for their emissions, are compensated for indirect emissions from their electricity purchases. Small businesses, i.e. non-residential customers with demand not exceeding 20 KW in over three months in a one-year period, will also receive revenue. The bulk of the proceeds will go to household customers.

The revenues will be first spent to offset direct costs in rates resulting from cap-and-trade. Thereafter, revenues are distributed equally to residential customers through the climate dividend. Small business will see their compensation levels decline over the life of the program, as electricity rates will rise at a gradual pace to reflect carbon costs. The transition will enable them to adjust to the program by investing in energy efficiency measures, improving operations and implementing clean energy technologies.

California’s cap-and-trade program allows businesses and consumers to benefit from an economic incentive and supports energy-efficient and cost-effective methods to reduce emissions. Electricity generators and retail customers have incentives to invest in greenhouse gas (GHG) reduction initiatives and retreat from emission intensive activities. These incentives are upheld by reflecting carbon costs in electricity prices. The major players in the allowance market must surrender their allowances to comply with the program. The compliance obligation of regulated utilities depends on the amount of power generated from fossil fuels.

California launched its first carbon allowance auction on November 14, 2012. In its first auction, 23 million allowances sold at $10.09 each, raising about $230 million. Though part of the funds are under the control of the state legislature, the law does not treat the revenue as tax income, implying that it cannot go to the state’s general fund. Following the allowance auction, CPUC released a Proposed Decision that directs the spending of auction revenues. The proposal allocates about 15% of the proceeds for GHG reduction programs and directs the remaining 85% as rebates to utility customers.

The climate dividend offsets the indirect impact of carbon pricing in the overall economy. CPUC’s plan offsets potential price rises for goods and services as a result of implementing the cap-and-trade program. Though potential price rises in gasoline and electricity will prompt energy conservation, the plan aims at aiding residents so they do not turn against the program. While households will receive aid against price rises, carbon pricing will be reflected in utility bills of the state’s largest energy consumers starting in 2013. The plan intends to bolster the carbon market while shielding consumers from higher energy costs. CPUC’s decision also furthers the state’s intention to put a price on carbon.

Angelique Mercurio is an energy policy analyst and a founding partner at Energy Solutions Forum Inc., an energy policy research and data company based in New York City.