California’s Greenhouse Gas Reduction Fund (GGRF) is an important source of public funding to achieve the state’s climate and equity goals. Established in 2012, it generates on average about $3 billion each year for appropriation by the Legislature. The current main programs funded by the GGRF include High-Speed Rail and Affordable Housing and Sustainable Communities.
In this blog post we analyze GGRF spending as it relates to achieving the state’s climate goals. We evaluate the cost-effectiveness of current programs ($/ton of carbon reduced) as well as their consistency with strategies identified by the California Air Resources Board as needed to achieve carbon neutrality by 2045. Overall, the data indicates that there are multiple GGRF programs that are not cost-effective, requiring thousands of dollars to reduce one ton of carbon. The data also shows a large inconsistency between GGRF programs and the clean energy investments needed to achieve state climate goals.
As the window of opportunity to address climate change closes, the Legislature may consider reviewing current GGRF appropriations, unchanged since 2014, in light of the state’s most recent climate plans. Key technologies currently lagging in deployment include offshore wind, clean hydrogen and carbon removal. Key infrastructure needs include transmission and carbon dioxide transport and storage.
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California’s ambitious climate goals require the development of enormous amounts of new clean energy assets and infrastructure. In its 2022 Scoping Plan, the California Air Resources Board (CARB) identified needing to quadruple solar and wind generation, alongside major expansions in energy storage, electric vehicles, clean hydrogen and carbon removal for the state to achieve carbon neutrality by 2045.
California’s Greenhouse Gas Reduction Fund (GGRF) is an important source of funding to deliver the state’s climate goals. The GGRF generates roughly $3 billion each year from Cap-and-Trade auction proceeds including more than $4 billion in recent years. The Legislature then has the authority to appropriate GGRF funds “to facilitate the achievement of greenhouse gas emissions reductions in the state and, where applicable and to the extent feasible, maximize economic, environmental and public health benefits [as well as] direct investment toward the most disadvantaged communities and households in the state”.[1]
It has been almost a decade since the majority of current GGRF allocations were established by the Legislature. In the time passed, there have been two comprehensive state climate planning processes (2017, 2022) as well as a large number of reports from the California Energy Commission, California Public Utilities Commission and multiple other agencies related to California’s energy transition. It is relevant, therefore, to assess the ongoing alignment between current GGRF allocations and the actions identified in these more recent reports as needed to achieve a carbon neutrality by 2045 goal.
How big is the GGRF? Where does the money go?
Figure 1 summarizes the total funding – $22 billion – that has been appropriated from GGRF to various programs over time.
The blue represents programs that receive annual (or ‘continuous’) appropriations. Established in 2014, continuous appropriations represent 60% of total appropriations to date – or $13 billion. The main programs that receive continuous appropriations include High-Speed Rail and Affordable Housing and Sustainable Communities.
The green represents programs that receive discretionary appropriations, which may change in any given year. Discretionary appropriations represent the remaining 40% of total appropriations – or $9 billion. The main programs that have received discretionary appropriations include Low Carbon Transportation, Forest Health and Community Air Quality Protection.
How cost-effective are GGRF programs? And the GGRF portfolio as a whole?
With data on emissions we can estimate GGRF cost-effectiveness ($/ton of carbon reduced). CARB tracks GGRF emissions data as part of its California Climate Investments program. The exception is High-Speed Rail, the emissions data for which is estimated by the High-Speed Rail Authority.[2]
Overall, GGRF has reduced 98 million tons of carbon, or about 10 million tons per year. The cost-effectiveness of GGRF programs – of which there are 79 in total – ranges from roughly $9 to $2,000/ton, with multiple observations above this range. The data shows that 4 programs alone are responsible for the majority of reductions (73%) despite these programs receiving only 16% of total funding (Table 1).
In order to develop an estimate of the cost-effectiveness of the GGRF portfolio as a whole, we average across each of the 79 programs. We weight this average by the relative importance of each program, determined by the amount of funding it has been allocated over time. (This reduces the statistical influence of outlier programs that may have received very little funding yet have an artificially high or low $/ton.) Using this method, we estimate the weighted average cost-effectiveness of the GGRF portfolio to be $1,003/ton. That is, $1,003/ton is the expected cost-effectiveness of a given GGRF program investment.
For more information, including alternative approaches to data analysis and why we view a weighted average as most appropriate, see the “Note on data analysis related to GGRF” at the end of this article. Additionally, for GGRF funding and emissions data as well as the description of a methodology to estimate HSR program cost-effectiveness, see this excel spreadsheet.
Comparing GGRF against best available cost estimates
We can compare GGRF $/ton data against the best available third party estimates of how much it should cost to reduce emissions (Figure 2).
The above diagram, showing a ‘cost curve’ of climate investments, highlights that the majority of emissions reductions should be achieved for less than $180/ton, well below the $1,003/ton GGRF estimate. The current Cap-and-Trade clearing price of $35/ton can also help address lower cost opportunities.
Although this approach is not a perfect measure – for example, there are many real-world complexities that can increase the cost of emissions reductions compared to model estimates; the cost curve provides a simple, aggregated view of the main mitigation options only – the gap is so large to suggest that at least a review of the GGRF program and its allocations for achieving carbon neutrality would be useful.
Preliminary suggestions on GGRF investments
GGRF supports multiple important programs for reasons that extend beyond pure emissions reductions. However, by reviewing the state’s roadmap for achieving carbon neutrality we can identify priority clean energy technologies and infrastructure that are significantly lagging in deployment and could benefit from a revised state climate investment plan. These include:
- Offshore wind: California has a major ambition to establish 20 GW of offshore wind by 2045. These are significant projects that require supporting infrastructure in the form of ports, waterfront facilities and, most importantly, transmission. The passage of SB 1373 to allow for central procurement of offshore wind was an important policy passed this year. State investments that can support the siting and development of enabling infrastructure are crucial to realize somewhere near the 20 GW deployment ambition in only two decades.
- Clean hydrogen: California’s recent success in achieving federal Hydrogen Hub money to the tune of $1.2 billion is an incredible kickstart to in-state clean hydrogen development. However, the scale of ‘new’ hydrogen economy envisioned in state climate plans for decarbonizing industry, heavy-duty transport and more is far greater than this initial down payment. State investments can support core infrastructure in transport and storage as well as help drive production that meets the ‘three pillars‘ requirements for green hydrogen.
- Carbon removal: California anticipates carbon removal in the form of direct air capture and biomass carbon removal with permanent storage to provide as much as 15% of its total solution for carbon neutrality by 2045. However, many of these new technologies cost much more than current incentives, including from the LCFS and 45Q tax credit. Additional funding to bridge the gap for early stage projects over the next 7-10 years, such as in the form of a procurement program similar to the DOE’s recent initiative or Contract for Difference payment similar to the UK, can drive down cost and get the state on track to its ambitious removal targets.
Conclusion
California’s Greenhouse Gas Reduction Fund is a crucial funding source to support the state’s climate goals. However, this funding is not currently spent as cost-effectively as it could be – with GGRF programs requiring about $1,000 to reduce one ton of carbon. This amount is far greater than estimates of what it should cost to develop new clean energy and certain infrastructure, the majority of which is under $180/ton. Given the majority of these appropriations were set almost a decade ago and before a number of key state climate plans, including the 2022 Scoping Plan, a review of current allocations is warranted. Offshore wind and clean hydrogen (and associated infrastructure) and carbon removal are key technologies currently lagging in deployment that could benefit from additional state investment.
For more information, please contact Sam Uden (sam@csgcalifornia.com) and Amanda DeMarco (amanda@csgcalifornia.com).
[1] For more information, see AB 1532 (Perez) – California Global Warming Solutions Act of 2006: Greenhouse Gas Reduction Fund (2011-12): https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120AB1532.
[2] Note that High-Speed Rail has not yet generated emissions reductions. Per the 2023 HSR Sustainability Report, it is estimated to generate up to 160,000 tCO2 by 2030. Based on current cost projections, this would result in a cost-effectiveness of $71,250 – $81,875/ton. As we do not believe this is an appropriate measure of cost-effectiveness for HSR, we developed our own for the purpose of this article based upon a 2045 time horizon, which aligns with the California’s long-term carbon neutrality goal. We estimate HSR cost-effectiveness on this basis at $1,832/ton. For more information, see the HSR tab of this excel spreadsheet, where you can follow the method and source documentation.
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A note on data analysis related to GGRF
There is more than one approach that could be adopted to analyze GGRF data. Above, we highlight a weighted average (or expected value) approach, which we view as the most appropriate. For the sake of completeness, we describe alternative options here.
One alternative, which could be thought of as a top-down approach, involves dividing total dollars spent to date ($13B) by total emissions reductions (98 MMTCO2e) from the 79 programs funded by the GGRF. This results in an estimated cost-effectiveness of $138/ton (Table A1).
A drawback with the top-down approach, though, is that it is unable to reflect important program-level information. For example, as shown in Table 1, 4 of the 79 programs alone are responsible for the vast majority of emissions reductions (73%) despite receiving only a small portion (16%) of total funding. It is arguable that $138/ton is not a true reflection of the cost-effectiveness of the GGRF portfolio. (Note that a similar observation was made by the Legislative Analyst Office in a 2016 report, available here).
A bottom-up approach can provide a better estimate of cost-effectiveness by incorporating program-level information. A bottom-up approach involves taking an average of the cost-effectiveness across the 79 programs. Without modifying the data in any way, this results in an estimated cost-effectiveness of $2,785/ton. An obvious drawback with this method, though, is that all programs, no matter how minor, are equally weighted. In other words this approach does not account for outliers – including a number of $0/ton estimates (i.e. where no emissions reductions have yet been achieved), which drags down the average, as well as an extreme $164,000/ton estimate, which greatly inflates the average.
We can address this issue in two ways. The first ‘quick and dirty’ method is to manually remove the outliers. The result, now across 52 programs, is an estimated cost-effectiveness of $1,079/ton. (Note that the sizable reduction in programs is because there are 26 programs that are $0/ton).
The second more formal approach is to calculate a weighted average across all of the programs. This involves weighting the $/ton estimates for each program by the amount of funding received by the program. For the purpose of the overall $/ton estimate, this puts greater emphasis on programs that are key to GGRF and receive a larger share of funding, and a lower emphasis on those that do not.
We can show this with a basic example. Two programs funded by GGRF include CARB’s Sustainable Transportation Equity Project (STEP) and CALSTA’s Transit program. CARB’s STEP program has a cost-effectiveness of $9,248/ton. CALSTA’s Transit program has a cost-effectiveness of $75/ton. An average of these two results is an estimated cost-effectiveness of ($9,248 + $75) / 2 = $4,662. But is this an accurate reflection of the cost-effectiveness of these two programs, given CARB’s higher-cost program has implemented only $45M worth of projects (0.3% of total GGRF funds), while CALSTA’s lower-cost program has implemented $1,341M worth of projects (10% of total funds)? Put another way, we should expect a result that is far closer to the CALSTA program $/ton estimate. A weighted average results in an estimated cost-effectiveness of [($1,341 * $75) + ($45 * $9,248)] / ($1,341 + $45) = $370. (Note another approach to calculate would be [($1,341 / $1,386) * $75] + [($45 / $1,386) * $9,248] = $370.)
We calculate the weighted average cost-effectiveness of the entire GGRF portfolio (79 programs). The result is a cost-effectiveness of $1,107/ton. However, it is clear that the $164,000/ton observation, even though this program receives only 0.2% of GGRF funding, continues to affect this result. By removing this observation alone, for the 78 programs the weighted average cost-effectiveness is $1,003/ton.
We summarize the results of the different methods in Table A2. We view the weighted average result, overall, as providing the most accurate representation of GGRF cost-effectiveness to date. For more information and to explore the data, see this excel spreadsheet.
