This article investigates the roles of policy diffusion and policy learning in shaping the design of California’s cap-and-trade system. On the surface, it is very similar to other cap-and-trade programs, but in practice many detailed differences reflect active efforts by California policy-makers to avoid flaws that they saw in other systems, such as the EU ETS and the US East Coast’s Regional Greenhouse Gas Initiative. We assess how California’s cap-and-trade system emerged, the significance of policy diffusion, and the lessons for other trading systems by applying two broad sets of theoretical frames—the role of policy diffusion and the role of organized local political concerns. We find that despite the signature status of the trading system, California mostly relies on much less transparent and more costly direct regulation. We also find that California’s cap-and-trade system has developed mostly in its own, special political context, which hampers the feasibility of cross-border trading.

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