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California Torn Over How to Spend Cap-and-Trade Riches

Gov. Brown wants to use as much as 80% of proceeds on the budget, an unpopular and possibly illegal idea, instead of using the money to control emissions.

Jun 12, 2012
Clean air rally in Oakland, Calif.

For six years, California has been embroiled in disputes and lawsuits over the creation of its economywide carbon trading program, the first such program in the nation and second-largest in the world.

Now, with just five months to go until its first carbon credit auction, one crucial debate remains: how to spend the billions that will be generated by the initiative.

Narrowly, the question is whether proceeds should go only to promote renewable energy and other low-carbon programs, or whether the state can use the money in other ways.

More broadly, the issue is whether California can show that the environmental and economic benefits of cap and trade, maligned in Republican circles as a regressive tax, will exceed its costs.

Late last month, the California Assembly made its position clear, by passing legislation that says cap-and-trade dollars have to be spent on programs that curb global warming emissions, a stance supported by environmentalists. The State Senate approved a related measure.

Yet neither bill would stop Gov. Jerry Brown from doing something opposed by many supporters and critics alike: diverting money to balance the state budget.

That's because written into a seperate budget bill is a stipulation that $500 million, as much as 80 percent of the expected total proceeds in year one, can be drawn for budget expenses, including patching holes. (Projections of first-year proceeds range from $600 million to $1.8 billion.) The measure is expected to win legislative approval, though likely with restrictions.

That same stipulation could appear in future budget bills.

Opponents of cap and trade say that using proceeds for general spending, instead of using it to control emissions, makes it an illegal tax on energy.

"It raises real legal red flags," and could give critics a basis for blocking the entire program, says Alex Jackson, a San Francisco-based attorney for the Natural Resources Defense Council (NRDC), an environmental group.

This lingering debate, and the legal unknowns, highlight the struggle that state lawmakers and regulators still face at this late date in designing cap and trade, with implications for possible future programs at the national level or in other states.

The program sets a ceiling on carbon dioxide emissions from electric utilities, oil extractors and fossil-fuel burning factories and requires them to pay for their pollution by buying carbon allowances in quarterly online auctions. The system will help the state meet its ambitious goal of cutting climate-changing gases by 30 percent by 2020.

At first, California will give away 100 percent of carbon allowances to utilities, and up to 90 percent to other polluters. The amount of free allowances will drop over time so that polluters pay for a bigger chunk of carbon credits.

In 2015, the scheme will expand to include natural gas companies and transportation fuel producers and suppliers. By 2020, cap and trade could bring nearly $8 billion in annual proceeds to California.

Clock Ticking, Only Vague Guidelines

So far the state has only established vague guidelines for how those proceeds should be spent. The first auction is slated for Nov. 14.

California's landmark global warming law, AB 32, only says money must flow into the state's existing Air Control Pollution Fund, which is managed by the California Air Resources Board, or CARB. Assembly Bill 1532, approved on May 29, sets limits for how the money can be used—that is, for the chunk that isn't diverted for general spending. 

The bill says proceeds must funnel into a separate Greenhouse Gas Reduction Account within the pollution fund, which could then be tapped for programs that fall under four areas: clean energy and energy efficiency, low-carbon transportation, natural resource protection, and the research, development and deployment of clean-air technologies.

The bill also puts CARB in charge of proposing how, specifically, to invest proceeds. Every three years, the agency would craft an investment plan that the State Legislature would review, tweak and approve. Programs may include those that help homeowners retrofit a house, or those that help businesses switch their transporation fleets from diesel to biofuel.

CARB spokesperson Dave Clegern declined to comment on how CARB seeks to spend the proceeds. "We will be working with the governor, the Department of Finance and the legislature to develop an effective investment plan."

The State Senate is now considering the Assembly bill. It also passed its own cap-and-trade bill on May 31, which says only that proceeds must be used "for purposes of carrying out" AB 32. The two houses are expected to hammer out a compromise before the legislative session ends on August 31.

Lawmakers are also considering the controversial 2012-2013 budget bill, which would take $500 million from next year's auctions. The deadline for approving that bill is June 15.

Jackson of NRDC says he expects the Assembly and Senate to pass the bill, though in what form is up in the air. He says both houses are considering provisions that would force at least some of the money to be spent on environmentally focused programs within the general fund. (The state's nonpartisan Legislative Analyst's Office details programs in the general fund that would meet the state's greenhouse gas goals without raising questions of legality. The programs total $100 million.)

In addition to using the proceeds to help patch the state's $16 billion budget shortfall, Gov. Browns wants to use the money to build an $86 billion high-speed rail line, which would also require legislative approval.

How Should the Money Be Spent?

In a recent report, the public policy group Next 10 laid out 18 options to consider for the billions expected to flow from auctions.

The study confirmed what many economists already know: Energy efficiency investments would give the biggest bang for the buck.

An investment of $700 million of proceeds in improving efficiency in homes, businesses and appliances, for example, would create up to $997 million in economic activity and up to 8,751 full-time jobs over a seven-year period, more than any other type of investment. Channeling that same $700 million in non-environmental projects, like balancing the budget, would create less than 1,800 jobs and $285 million in gross state product, the study says.

The 18 scenarios "yield very different benefits," says David Roland-Holst, author of the economic analysis and a professor of agriculture and resource economics at UC Berkeley.

"Who gets this money and what they use it for matters to the rest of the state." Next 10 says it has no position on how to spend the proceeds.

Many economic experts agree that energy efficiency is such a strong economic driver because it significantly reduces spending on fuel and electricity, which frees up money to spend elsewhere in the economy. Home improvement projects also put more people to work than other sectors, Roland-Holst says.

Under the nine-state Regional Greenhouse Gas Initiative, the nation's first cap-and-trade system for the power sector only, Massachusetts invested nearly all its auction proceeds to improve energy efficiency in homes and offices. That translated into about $500 million in new economic activity and 3,800 jobs between 2008 and 2011, more than any other state in the pact, according to an independent study.

Kathryn Phillips, who directs the Sierra Club's California chapter, says energy efficiency should be one of many options for ensuring that cap and trade produces as many environmental benefits as possible.

"I don't think all the money is going to go to any one thing, and it probably shouldn't, because there are lots of different ways to skin the cat," when it comes to climate change, she says.

How to Spend Proceeds Is Wrong Debate

For critics, though, the debate isn't about how to spend auction proceeds at all—it's about whether the state is even allowed to generate proceeds in the first place.

"We think it's illegal to collect the revenues," says Gino DiCaro, vice president of communications of the California Manufacturers & Technology Association. "The cap-and-trade auction is collecting far more money for emissions credits than it needs for the state to actually reach its AB 32 goals." The association represents 600 manufacturers in the state.

The California Chamber of Commerce agrees. "There is nothing in AB 32 that expressly grants CARB the authority to raise and distribute revenue in the cap-and-trade program," Brenda Coleman, a policy advocate for the chamber, wrote in a May 29 letter to the state Assembly in opposition of bill 1532.

Both groups have come out strongly in the media and on their websites against the Assembly and Senate bills for promoting the auction system. So far there have been no lawsuit threats.

Whatever happens, the stakes are high for California's cap-and-trade program, says Larry Goldenhersh, president and CEO of Enviance, an emissions management software company in Carlsbad, Calif.  Enviance sells web technology to polluters so they can measure, manage and report their greenhouse gas emissions.

"California's experience in the next several years is going to drive the way the nation goes" on carbon trading, Goldenhersh says.

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