Brown’s Proposed Use of Cap-and-Trade Proceeds Draws Warnings of Legal Challenge

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There might be more money in the first year of California’s cap-and-trade program than expected. Governor Brown’s 2012-2013 budget includes $1 billion in revenue from the state’s cap-and-trade program, ramping up this year as part of California’s 2006 climate legislation, known as AB 32.

That much revenue from the initial auction might seem surprising since 90 percent of permits to emit greenhouse gases will be given away to industry. But the Legislative Analyst’s Office (LAO) says that selling just ten percent of allowances at auction could generate that much cash. The price for an emission allowance is not capped, though there is a floor price of $10. As such, projections are ranging from $10-$40 per credit or more, which means that the state might haul in even more than $1 billion in this first auction go-around.

The Governor’s proposal is buried in the text of the 258 page "budget summary" dated January 5. The proposal discusses the Administration’s preferred uses of the approximately $1 billion of anticipated revenues from the initial auctions of cap-and-trade allowances, which will take place later this year. Under the Administration’s proposal the proceeds from the auctions would be deposited into an account administered by California’s Air Resources Board (ARB). The ARB and the Department of Finance would then submit a plan to the Legislature to spend these funds. Because the exact amount of these funds will not be known until late in fiscal year 2012-2013, the proposed budget does not list specific expenditures, instead it contains a "framework" that contemplates spending the funds to finance projects in the following categories.

The Governor’s budget indicates that he’s looking to spend in four broad categories:

• Clean and Efficient Energy
• Low-Carbon Transportation
• Natural Resource Protection
• Sustainable Infrastructure and Development

If the Brown administration can make the case that all the new and existing programs they want to fund fall within the purview of the law, they might avoid Sinclair entanglements. If not, the money tussle will likely end up in court.

It is the Administration’s position that these expenditures are authorized under AB 32, because funding will be used only for activities "that further the purposes of AB 32." The Administration asserts that about $500 million of these proceeds will be used to replace general fund monies (backfill) currently used to support various projects within the above categories that are funded through the general fund. The remaining $500 million will be new money.

Business’ reaction has not been enthusiastic. The Governor’s proposal has been denounced by business interests as a misuse of cap-and-trade funds that would constitute an illegal "tax" instead of a valid fee under AB 32.

Environmental groups generally support the proposal, although some grumbled about the use of the $500 million to backfill the general fund, instead of using the entire proceeds as a new injection of money to support various emission reducing projects.

Overall, the question as to whether the cap-and-trade funds constitute a tax needs to be settled. For an Administration faced with a $9 billion deficit, this billion dollars probably looks like small potatoes, as opposed to the industries that are being forced to pony up these dollars. Economists have projected that once fully implemented several years from now, carbon trading could represent a $15 billion annual haul for the state. That comes to about $120 billion by 2020.

Article written by John Larrea, Director, Government Affairs

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