Gov. Brown and lawmakers reach deal on spending billions in carbon cap-and-trade revenues

Source: Anne C. Mulkern, E&E reporter • Posted: Monday, June 16, 2014

Billions of dollars in revenues from California’s carbon cap-and-trade auctions will help fund development of the state’s high-speed rail line and pay for public transit, affordable housing and communities located near jobs and transportation under a deal struck yesterday.

Gov. Jerry Brown’s (D) office and top state lawmakers reached agreement on a package that carved up $870 million that the state expects to see in fiscal 2014-15 from its sales of greenhouse gas pollution permits to businesses. The pact also set up a plan for fiscal 2015-16 and beyond, when the program is estimated to bring in up to $5 billion annually.

The deal pledged continued funding for high-speed rail, though it reduced the amount dedicated to the embattled project, compared to what Brown had sought in his earlier budget proposal. He had allocated one-third of cap-and-trade monies to help build the planned bullet train connecting San Francisco and Los Angeles. The consensus yesterday instead allocated 25 percent.

“We’re pleased that under the compromise agreement, there is now an ongoing commitment to provide cap & trade proceeds for the project,” California Department of Finance spokesman H.D. Palmer said in an email.

The state Legislature’s budget conference committee approved the deal yesterday. The full Legislature still needs to pass the package with a vote scheduled for Sunday. Democrats control both the Senate and the Assembly.

California’s economywide cap-and-trade program requires businesses to turn in emission permits covering their greenhouse gas pollution. The law right now affects stationary sources of emissions, which include utilities, manufacturers and food processors. The program is scheduled to expand next year to wrap in the motor fuels sector. At that point, 14 refineries located in the state will need to start buying and submitting allowances for emissions tied to all fuel sales in California, estimated at 17 billion gallons annually.

The new pact creates a blueprint for spending the growing pool of money. But the proposal to allocate part of the cap-and-trade proceeds to high-speed rail — first floated by Brown — has been controversial. The line is projected to cost $68 million to finish, and much of the funding has been uncertain. State voters in 2008 approved nearly $10 billion for the train. But Sacramento Superior Court Judge Michael Kenny in November blocked the sale of bonds that the state planned to use to help pay for an initial $31 billion leg from Merced to the San Fernando Valley (Greenwire, Nov. 26, 2013).

The governor has pledged his commitment to the bullet train, and there are supporters in labor and other interest groups. Republicans in both California and the U.S. House, meanwhile, have sought to stop the development.

“Funding the construction of high speed rail is an inappropriate and likely unconstitutional use of cap and trade funds,” state Assemblyman Jeff Gorell (R) said in a statement yesterday. “Any expenditure of taxpayer money on high speed rail is a waste. It’s time to abandon that doomed project.”

A ‘gift’ to those challenging cap and trade

There also were warnings that allocating cap-and-trade money to the train — along with other elements of the spending deal — would help those seeking to have the court invalidate the state’s carbon market trading program as unconstitutional.

“The governor is using cap and trade auction proceeds to play Santa Claus for himself and his Sacramento colleagues, doling out dollars for bullet trains and subsidized housing and transit schemes,” Harold Johnson, attorney at the Pacific Legal Foundation, said in an email. “The connection between these projects and lowering carbon emissions is shaky and speculative at best. In fact, with the High Speed Rail project, the [state] Legislative Analyst indicates the construction process will actually make carbon emissions worse not better.”

Johnson called the deal on cap-and-trade monies “a nicely wrapped gift” to those challenging cap and trade in court.

“Brown is confirming what our lawsuits argue,” Johnson added, “that the auction amounts to a massive new scheme of general taxation to be used for the whims and wish lists of the politicians.”

The lawsuit argues that cap and trade is a tax and therefore unconstitutional. California law requires that all taxes be approved by two-thirds of the Legislature or state voters. Cap and trade was crafted by the state Air Resources Board under guidelines established in the state’s climate law, A.B. 32, which passed under a majority vote.

Kathryn Phillips, director of Sierra Club California, said that her group was concerned about using the money on high-speed rail because there is a need to reduce greenhouse gas emissions quickly.

“Based on high-speed rail authority’s own calculations, we’re not going to be getting emissions reductions from that near-term,” Phillips said. “It would seem more appropriate to put more money toward near-term reductions.

“Are these the appropriate funds to spend on high-speed rail, given the restrictions on the funds by law and the need to get reductions as soon as possible?” Phillips added.

State law requires that the cap-and-trade revenues go toward projects that further the purposes of A.B. 32.

The Department of Finance’s Palmer said in an email that “the use of cap & trade proceeds for high-speed rail was identified — after a multi-agency process with public input — in the 2012 [cap-and-trade] investment plan as an appropriate use for cap & trade proceeds.”

Legislature to decide part of future years’ monies

For the coming fiscal year, the agreement dedicates $250 million to high-speed rail, $200 million to low-carbon transportation, $130 million to “affordable housing and sustainable communities,” and smaller amounts to items that include weatherization projects, energy efficiency for water, sustainable forests and waste diversion.

For the years after that, high-speed rail will continue to receive one-quarter of the money. Twenty percent will go to housing and sustainable communities with half of that dedicated to affordable housing projects “that demonstrate a reduction in greenhouse gases.” Fifteen percent will be directed to transit and inner-city rail programs and low-carbon transit operations.

“The single largest contributor of greenhouse gases in California is the transportation sector and Californians are logging more vehicle miles annually than ever before,” state Senate President Pro Tem Darrell Steinberg (D) said in an email. “We’re on track to break the 400 billion miles barrier by 2020. Building new mass transit options near homes and commerce will dramatically reduce emissions and implementing this long-term strategy would be a huge victory for our environment, our economy, and the people of California.”

The state’s Legislature in fiscal 2015-16 and beyond will allocate the remaining 40 percent of the money for efforts that include “investments in low carbon transportation, natural resources programs and energy programs.”

Bill Magavern, policy director for the Coalition for Clean Air, said that in general, he supported the compromise deal.

“The category that was most important to us that was in the governor’s [earlier] proposal was the low-carbon transportation, so we’re happy to see the Legislature agreeing with that,” Magavern said. “The one area that we thought the governor’s proposal really missed was public transit, so we’re happy to see that the Legislature is stepping in and making sure that public transit is funded.”