The Illusion of Progress: The Waterbed Effect in California's Cap-and-Trade and the Unfulfilled Promise of Industrial Emission Reductions

California, often lauded as a leader in environmental policy, has recently found itself entangled in the complexities of its ambitious cap-and-trade system. While the state has made commendable strides in reducing emissions in the electricity sector, a closer examination reveals a troubling reality: California's policy mix has inadvertently disincentivized emission reductions in the industrial sector. Despite a shift from natural gas to renewables, the intended decarbonization across multiple sectors remains elusive. The Cap-and-Trade Conundrum Cap-and-trade was introduced as a market-based solution to control carbon emissions, with the principle that the market's invisible hand could guide industries toward greener practices. The theory suggests that by capping total emissions and allowing companies to trade permits, the market would naturally drive down emissions where it was most cost-effective. This approach has led to significant emission reductions in the power sec...