Will Cap and Trade cure California’s deficit?
By Wayne Lusvardi
California voters may soon ask themselves: “Why vote for an $8.5 billion sales and income tax increase in November 2012 if Cap and Trade is going to raise $50 billion to $100 billion for state discretionary spending? That’s $6.25 billion to $12.5 billion per year from 2012 to 2020.
But will Cap and Trade generate enough revenues, and can those revenues be used to bailout the state general fund deficit? That is the proverbial $16 billion deficit question.
Cap and Trade is a program authorized in 2010 under Assembly Bill 32, the Global Warming Solutions Act of 2006. AB 32 requires excessive air polluters to buy emission permits in an auction from those industries and utilities that pollute less than their pollution quota. The rules of Cap and Trade apply first to large industries; and by 2015 to utilities, including local municipal water and power departments. Eventually, 360 industries and utilities will be subject to Cap and Trade rules. Where the proceeds of these auctioned permits are to be spent is still to be determined.
California legislators have already started floating up a flurry of bills to divvy up the estimated $50 to $100 billion windfall from 2012 to 2020 from Cap and Trade auctions. This is addition to Gov. Jerry Brown’s notion to fund the cost of the California High-Speed Rail Project with Cap and Trade funds. The California Legislative Analyst’s Office has recommended against this proposal because the funding is too speculative.
Cap and Trade Fund Distribution Bills
Assembly Bill 1532, sponsored by Assembly Speaker John Perez, D-Los Angeles, would deposit Cap and Trade pollution permit monies into a new Greenhouse Gas Reduction Account to be controlled by the California Air Resources Board.
Senate Bill 535, sponsored by State Sen. Kevin de Leon, D-Los Angeles, would divert some of the Cap and Trade auction funds to disadvantaged communities, affordable housing, hospitals and schools.
Senate Bill 1572, the AB 32 Revenue Investment Plan, sponsored by State Sen. Fran Pavley, D-Los Angeles, devises a strategic investment plant to distribute Cap and Trade proceeds.
AB 2404, the Local Emissions Reduction Fund, sponsored by Assemblyman Felipe Fuentes. D-Arleta, would delegate the award of Cap and Trade monies to the Strategic Growth Council — a six person cabinet level committee under the Governor’s Office.
What is the Strategic Growth Council?
The Strategic Growth Council was authorized under Senate Bill 732 in 2008, sponsored by State Sen. Darrell Steinberg, D-Sacramento. It creates a cabinet-level committee to serve as a clearinghouse for the distribution of Cap and Trade funds. According to the Strategic Growth Council website, a laundry list of activities can be funded: “to improve air quality, protect natural resources, increase the availability of affordable housing, promote public health, improve transportation, encourage greater infill and compact development, revitalize community and urban centers, and assist state and local entities in the planning of sustainable communities.” But this may be a wish list more than what Cap and Trade auction proceeds can be legally spent on.
Who is on the Strategic Growth Council?
The Strategic Growth Council is composed of six members. Five are the heads of state agencies and a sixth member is from the public.
Current Council members include:
Ken Alex, secretary of the Office of Planning and Research;
The Strategic Plan of the Growth Council for 2012 can be found here.
Cap and Trade Auction Monies Hit Prop. 13 Snag
California’s Proposition 13, passed in 1978, mandates that any tax must be approved by two-thirds of the voters. Proposition 26, passed in 2010, added fees, charges, levies or tax revenue allocations as prohibited without a supermajority vote.
AB 32 authorized the California Air Resources Board to devise a Cap and Trade emission program. But it was only passed by the Legislature. It was never put to an election. So we don’t know if all the bills for spending Cap and Trade proceeds are legal yet.
A number of liberal non-profit and advocacy organizations have leapt into the void and have issued quasi-legal opinions as to whether California can divert Cap and Trade funds to its operating budget, to fund the proposed bullet train project, and to a number of other programs.
Next10, a liberal non-profit public policy organization, has issued four reports on “Using the Allowance Value from California’s Carbon Trading System: Legal Risk Factors, Impacts to Ratepayers and the Economy.”
The liberal environmental policy think tank Resources for the Future has issued a report, “The Variability of Potential Revenue from a Carbon Tax.”
Both reports tend to concur that Cap and Trade auction revenues cannot be used for unrelated programs or reduced tax rates. If California used Cap and Trade proceeds for ineligible activities. it would be vulnerable to a legal challenge under Prop. 13 and Prop. 26.
Some Cap and Trade proponents claim that pollution credits or allowances are not taxes, but a fee. But Prop. 26 forbids imposing fees without a supermajority vote.
The University of California Berkeley’s Center for Law, Energy and the Environment, which prepared one of the four reports for Next 10, concluded that channeling Cap and Trade funds to projects that reduce or lessen greenhouse gas emissions is the least legally risky option. The center made four conclusions: 1) re-directing Cap and Trade proceeds back to electricity ratepayers could offset all the costs imposed by Cap and Trade; 2) the way in which Cap and Trade proceeds are re-directed back to ratepayers will affect the efficiency of the program; 3) if electricity bills are reduced by Cap and Trade credits, that may affect the political perception of the program; and 4) electric rate increases will result from other AB 32 policies — namely, the 33 percent renewable power requirement – and these costs may be substantial and occur independently of the Cap and Trade portion of AB 32.
A flaw in this report is to assume that there will be no transaction costs for administrating and monitoring Cap and Trade. Not all costs will be returned to ratepayers. And if they were, ratepayers might ask: Why implement the program in the first place?
In a 2009 report, David Roland-Holst, a professor of resource economics at the Berkeley center, said Cap and Trade revenues must be returned to utility customers either in the form of rebates or subsidized electricity bills. Holst said that home energy efficiency projects generate more Gross Domestic Product and employment growth.
There are several problems with this proposal. Newer homes have been built to Title 24 Building Energy Efficiency Standards and would likely not require any energy efficiency work. And large numbers of older housing stock have been retrofitted with energy efficiency improvements either as a condition of home remodeling permits, or have been retrofitted with state, federal, and public utility energy efficiency programs that started around the mid-1970’s. Another problem is that any subsidized home energy efficiency loans would likely end up creating another sub-prime loan and a financial bubble.
Anything that substantially deviates from reducing greenhouse gases will no doubt be tested by a legal challenge under Prop. 13 and Prop. 26.
Cap and Trade Prone to Government Gaming of System
The California Air Resources Boardhas been spending a lot of money on retaining consultants and monitors to prevent the gaming of the Cap and Trade auctions by third-party speculative traders. But it may not be traders that would be of the most concern if the activities that can be funded under Cap and Trade are expanded beyond reducing pollution.
The California Public Utilities Commission and CARB have estimated that the proceeds from Cap and Trade auctions could total $50 billion from 2012 to 2020. But Robert Lucas, a consultant with the California Council for Environmental and Economic Balance, is quoted in Forbes.com that if pollution allowances are held in reserve by CARB for any year, the unit price per ton of reduced carbon pollution could spike to $40 or $50 per ton. Lucas said, “we could be talking about $100 billion between now and 2020.”
This would provide a perverse incentive for CARB to intentionally withhold pollution allowances to generate revenues for greedy bureaucratic agencies seeking to perpetuate themselves with Cap and Trade revenues. California could see a return to skyrocketing electricity prices, as experienced in the 2000-01 Electricity Crisis. And where would the check and balance be for voters and electricity ratepayers if the only referees to appeal to have a stake in the system?
If Cap and Trade were allowed to directly or indirectly plug the state operating fund budget deficit, gaming bureaucrats could hide behind a “veil of the carbon market” to jack up electricity rates and inflate the price of nearly all goods.
Cap and Trade Won’t Cure Budget Deficit
It is highly unlikely that proceeds from Cap and Trade auctions can be used to reduce or cure the state budget deficit. Politicians may be queuing up with bills full of funding wish lists. But any effort to liberalize the eligible funding activities under Cap and Trade will be met with lawsuits as well as a possible voter revolt.
A 2010 study by T2 Associates for the AB 32 Implementation Group raised concerns about Cap and Trade taking in eight years more than 120 percent of the single year 2009-10 state budget.
But the gnawing questions remain: Why impose Cap and Trade charges at all if they just have to be re-circulated back to electricity ratepayers? If electricity ratepayers are given home energy efficiency rebates, isn’t this just another stimulus program? And hasn’t home energy efficiency been accomplished much more cost effectively by Title 24 Building Energy Efficiency Regulations and utility company rebates since the mid-1970′s?
Neither California politicians nor bureaucrats apparently know today what to spend Cap and Trade taxes on. The transaction costs to implement the Cap and Trade program were estimated at $8 billion by the Congressional Budget Office. And when you factor in the complexity that Cap and Trade will add to the economy, is a tax the best solution to reducing pollution?
The experience with the California Energy Crisis of 2001 is that things won’t turn out as expected and are often much worse than leaving them alone.
May 18, 2013