One of the attractive aspects of a cap-and-trade program is that it sets a firm limit on emissions, enhancing the reliability of achieving the desired emission objective. In practice, to create policy certainty for emitters, the number of emission allowances that will be issued under the program is set several years in advance of the program start, and is set for multiple years. While the greenhouse gas emissions goal is the overriding concern for setting the number of emission allowances, other factors must also be considered, including anticipated emissions in the absence of the program, costs of reducing emissions to the targeted levels, and variations in emissions due to weather and other factors. Some emitters will reduce emissions in anticipation of the program, so that emissions may be lower than anticipated when the program starts. Each of these factors is uncertain, which poses challenges for establishing an allowance budget that reliably reduces emissions at an acceptable cost, while also motivating investment and innovation.

We analyze the outcomes observed in the European Union Emissions Trading System and the Regional Greenhouse Gas Initiative, and how lessons learned from those experiences were applied by California regulatory authorities in the design of the California cap-and-trade program. We examine the models and data used in determining program features, including the allowance auction price floor, the limit on the use of offsets, and the Allowance Price Containment Reserve, were developed to ensure that environmental goals could be achieved reliably given the uncertainty in potential market outcomes.