What is ‘Cap and Invest’?

New York’s plan to put a price on carbon is still on hold. But here’s how it would work, if and when it gets off the ground.

This story originally appeared in New York Focus, a nonprofit news publication investigating power in New York. Sign up for their newsletter here. Update: January 17, 2025 — At her State of the State address on Jan. 14, Governor Kathy Hochul appeared to once again delay her cap and invest plan. Read New York Focus’s coverage of that development here.

By Colin Kinniburgh , New York Focus

After years of studies and planning, New York finally appears poised to move ahead with its biggest effort to fund the state’s green transition. Governor Kathy Hochul is expected to unveil the program, dubbed “cap and invest,” next week as part of her 2025 agenda, and it could take effect as soon as the end of this year.

So what is it?

What’s the problem?

New York’s climate agenda is ambitious — and expensive, up front. The state estimates it’ll cost at least $15 billion per year, in both private and public investment, to remain in compliance with the law and reach net-zero emissions by 2050, a goal that will help the US meet its obligation under the Paris climate agreement. The big question is who will pay for it, and how. Other states and countries have had to contend with the same question in their own race to zero emissions. One common answer, particularly popular among economists, is a carbon pricing scheme, which charges big emitters for each unit of planet-warming gas they put into the atmosphere and uses the revenue to pay for climate action.

How do carbon markets work?

Whether you call it an “emissions trading system,” “cap and trade,” or “cap and invest,” market-based carbon pricing schemes all involve the same core elements:

A cap on the amount of greenhouse gas emissions the state can produce, declining annually to achieve specific targets.

A price on emissions, set through state-run auctions in which companies bid on “allowances.” One allowance allows a company to emit one ton of pollution. Polluting entities, such as utilities and factories, must buy enough allowances to cover their emissions every year.

A secondary market allowing trading of allowances between firms.

State investment of auction proceeds into climate-friendly initiatives like electrification of buildings and transportation.

This model holds out both a stick (the allowance price) and a carrot (green investment) for businesses and households in the hopes of driving a virtuous cycle of emissions cuts. By fixing the “supply” of emissions, the program lets the market decide what their price should be. In principle, this should allow economies to achieve targeted emissions cuts in the most cost-effective way possible.

Where did this idea come from?

The idea of taxing pollution dates back at least to the 1970s, and has spread over the last 20 years as a way to tackle greenhouse gases in particular. The European Union adopted the world’s first major carbon pricing scheme in 2005. Since then, dozens of countries have put a price on emissions, either via “cap and trade” programs like Europe’s or carbon taxes. Former President Barack Obama tried to pass a US cap and trade program in 2009 but failed, and the policy has been a nonstarter at the federal level ever since.

There are state and regional programs, though. The East Coast has one for power plants that has been up and running for more than 15 years. California passed one in 2012 and was the lone state to have an economy-wide carbon price for almost a decade, until Washington followed in 2021.

New York leaders have been considering following that approach since late 2022, when experts were finalizing the state’s plan to meet its 2019 climate law. Hochul passed a rough outline of the policy through the state budget in 2023, and regulators have been working behind the scenes since then to fill in the details. Hochul is expected to announce next steps this month.

Does it actually reduce emissions?

The short answer is yes. Most analysts agree that cap and trade policies have helped reduce emissions where they’ve been implemented. But there is wide disagreement on how much of a role they’ve played compared to other climate policies and whether they’ve relieved pollution in the most burdened areas.

Environmental justice advocates have long contended that California’s version of cap and trade has only worsened air quality in disadvantaged communities, as power plants and refineries in those areas have been more willing to pay to keep polluting than their counterparts in richer areas, where operating costs are higher. Studies on the issue are mixed. One recent analysis, from the think tank Resources for the Future, found that disadvantaged communities in California have in fact seen greater emissions cuts than the state as a whole.

As for Washington, it’s still too early to say. The program is less than two years old, and there’s not enough data yet to evaluate its effectiveness.

How similar will New York’s program be to those on the West Coast?

Regulators have indicated that New York will follow the same broad formula. But there are a few key differences.

Price ceiling: New York’s cap and trade program, like California’s and Washington’s, will likely include both an upper and lower limit on allowance prices. Typically, these are meant to protect against major swings in the market, not set the actual price of emissions. In the first two years of its program, Washington’s prices ranged from $26 to $63 a ton, hitting neither the floor nor the ceiling set by the state. That suggests the market was working as intended.

New York, by contrast, wants to set a price ceiling that is lower than the floor in its peer states. At an initial price of $14 or less per ton, the state is almost certain to sell out of allowances and be forced to issue more, taking the “cap” out of cap and invest. Regulators’ own modeling found that this would lead to emissions at least 15 percent higher than the state’s legal limit in 2030. Officials have presented this tradeoff as necessary to preserve affordability — and, tacitly, the program’s political viability.

Offsets: In other ways, New York’s program will likely be more stringent than its peers’. For one, the state has said it will bar offsets — credits for programs like forest conservation that polluters can buy in lieu of reducing pollution on site. Reporting in recent years has found many offsets to be worthless, and critics have singled out their inclusion in California’s program as one of its biggest flaws. (Washington’s program also includes offsets.)

Use of funds: Like most places that put a price on carbon, New York plans to use the bulk of its revenue to fund green initiatives. The 2023 cap and invest legislation requires that one-third of the funds be reserved for direct rebates to New Yorkers, to offset an expected increase in energy prices when the program takes effect.

California similarly gives a portion of revenues back to customers through their utility bills, and Washington handed out a one-time $200 credit to low- and moderate-income utility customers last year. But New York has gone further in carving such rebates into law.

How would all this affect me?

Cap and invest will likely push energy prices up somewhat, since New York still relies heavily on oil and gas. In a way, that’s the point: to make fossil fuels less attractive and nudge the economy toward clean energy. Analyses of the programs in California and Washington have found that they’ve raised gasoline prices about 27 cents per gallon. Other prices could go up, too, as energy costs trickle through the supply chain.

But that doesn’t necessarily mean a higher cost of living for everyone. Thanks to rebates, the state projects that many low-income people would actually see a small net savings from cap and invest, which would increase over time as more of the investments bear fruit — weatherizing homes, for example, which reduces monthly energy bills. Middle-income households likely would see a net cost increase, though, in the ballpark of $10 a month during the first year of the program.

What’s next?

Hochul is expected to announce key details of the state’s cap and invest program next week as part of her State of the State address. The program’s structure should largely be set out in rules drafted by the Department of Environmental Conservation; it is possible those will be backed up by legislation that Hochul will include in her annual budget proposal later this month, or that legislators themselves will propose.

Once the draft rules are published, they will be subject to public comment before the state can finalize them and hold a first auction. Two advocates, who asked to remain anonymous to discuss private conversations with the governor’s office, said Hochul is aiming to issue the final rules and hold a first auction by the end of this year, in something of a scramble to catch up after long delays in issuing the draft rules. That’s a very ambitious goal considering that the review process for most regulations takes at least a year — let alone rules to establish something as sweeping as an economy-wide price on carbon.