Where to spend $1.5B in cap-and-trade revenue?

Source: Anne C. Mulkern, E&E News reporter • Posted: Monday, August 28, 2017

California’s Legislature is debating how to spend about $1.5 billion in revenue from the state’s cap-and-trade program for carbon dioxide emissions in the next year, with the potential for far more in years ahead.

The $1.5 billion reflects the amount projected for the upcoming fiscal year plus an existing pool of unspent funds, a fiscal analyst told the state Senate Budget Subcommittee on Resources, Environmental Protection, Energy and Transportation at a hearing yesterday.

There’s more confidence that healthy funds will come in now, after the Legislature last month secured the two-thirds vote needed to extended the state’s landmark climate program through 2030.

The most recent auction, held shortly after that vote, generated about $640 million in state revenue. The Aug. 15 sale saw allowances, which businesses buy to cover their greenhouse gas emissions, garner $14.75 per ton, $1.18 above the floor price. It was the first time since 2015 that all allowances sold.

“It is an indication that demand for allowances might be firming up,” Brian Brown, managing principal analyst with the nonpartisan Legislative Analyst’s Office, told senators. Brown added, however, that “there’s still quite a bit of uncertainty,” given a history of volatility with the program.

He advised that the Legislature might consider holding some funds in reserve or creating a bucket system with tiered priorities.

The state already has spent more than $3.4 billion from cap and trade, on efforts such as funding for affordable housing near transit, trees in urban areas, solar panels and weatherization upgrades for low-income households, rebates to motorists who bought plug-ins and other qualifying cars, funds for electric delivery trucks, electric school buses, hydrogen-powered buses and light rail.

The Senate subcommittee hearing followed another hearing on the same issue Tuesday with the Assembly Budget Subcommittee on Natural Resources and Transportation. Assemblymember Richard Bloom (D), chairman of that panel, said decisions legislators would make were pivotal.

“How we do this is going to set the stage as it always does for our future allocations, so our considerations here are very, very important,” Bloom said.

Neither panel made any decisions, but both heard comments from dozens of people who lined up to suggest how lawmakers should spend the cap-and-trade proceeds. The requests included money for transit, free transit passes for low-income riders, money for wetlands that store carbon, waste diversion, energy efficiency rebates and prescribed burns of dying trees.

The bill extending cap and trade, A.B. 398, shifted how California will look at spending its revenues in the future. Under the existing program that runs through 2020, the money mostly needs to go to programs that reduce greenhouse gas emissions. The extension measure allows more flexibility. It stated priorities for allocations that include climate adaptation, research on renewables or energy efficiency, and reducing other air pollutants.

“Housing being a top priority, I think it’s worth considering whether we want to up the ante on how much money we are devoting to affordable housing,” Bloom said during the Assembly subcommittee hearing. “For me, that’s a very important priority.”

As part of the two-thirds vote for an extension, the Legislature also negotiated with Gov. Jerry Brown (D) to cancel an earlier deal that gives a continuous appropriation of 60 percent of the funds to certain categories, including development of a high-speed rail line connecting Los Angeles and San Francisco, affordable housing near transit, and intercity rail programs.

That won’t kick in for a few years, however, so the current pool of existing and anticipated revenues falls under the former deal, with 60 percent of the funds pre-allocated.

The money the Legislature has to spend now includes about $800 million from previous auctions that the Legislature hasn’t allocated, plus $2.5 billion to $3 billion estimated to come in from future auctions. That’s assuming prices for allowances stay near the floor price but mostly sell out. However, the 60 percent continuously allocated amount will get subtracted from the total.

Paying for sweeteners

The cap-and-trade extension deal also included sweeteners to attract Republican and moderate Democratic votes, and the cost of those likely will come out of auction revenues.

A provision in the measure suspended until 2031 a fee applied to homes in areas where the state is responsible for fighting fires. A sales tax exemption for purchases of some equipment used in manufacturing was due to sunset and instead was extended and expanded.

The cost of backfilling those will total about $300 million for fiscal 2017-18, said Brown with the Legislative Analyst’s Office.

After subtracting the continuous appropriation that’s still in effect, the Legislature will control about $1.5 billion for the next fiscal year, he said.

Lawmakers also will have to figure out how to fund a companion measure that passed along with the cap-and-trade extension.

A.B. 617 was offered to address some concerns about local pollution. It requires local air districts to speed up retrofits of industrial emission sources in places out of compliance with federal Clean Air Act standards. It mandates the installation of “best available retrofit control technology” no later than 2023. It also creates local monitoring systems for conventional air pollutants in disadvantaged communities and potentially at specific stationary sources.

Those monitors could run several million dollars for each region, said those who spoke yesterday. Thomas Addison, senior policy adviser at the Bay Area Air Quality Management District, said his agency likely would incur a one-time cost of $23 million plus ongoing expenses of $10 million annually.

There’s legislation that would require refineries to pay for those costs, and some who spoke yesterday urged lawmakers to make oil companies pay.

Bullet train debate

One senator criticized the continued spending on the bullet train.

“A tremendous amount has been and will continue to go at the high-speed rail,” said state Sen. Jim Nielsen (R) of Fresno. “I’m having a little trouble figuring out how that can possibly be justified, that enormous amount of money, compared to other uses.”

He said that expenditures are supposed to go to projects that shrink greenhouse gas emissions, yet the train won’t do so for decades when it’s finished.

“How can we ask for a projection over 50 years that we’re going to reduce greenhouse gases by the use of the speed train over such a long period where everything else is justified over a much shorter period of time?” Nielsen asked.

Matt Almy, assistant program budget manager at the state Department of Finance, said that the Brown administration is looking at the spending as a sort of investment portfolio.

“In your investments, sometimes you have short-term investments; sometimes you have long-term investments.” Almy said. He added that the Paris climate agreement indicated the need to seek “reductions on the long-term horizon. That has the chance in terms of vehicle miles traveled to have a transformative effect on carbon emissions.”

In California, 40 percent of greenhouse gas emissions come from the transportation sector.

Nielsen responded, “Color me very unconvinced.” He said his constituents in the Central Valley find the idea that enough people will use the train “laughable.”

State Sen. Bob Wieckowski (D), chairman of the Senate Budget Subcommittee on Resources, Environmental Protection, Energy and Transportation, warned that there isn’t enough money to go around.

Whether the auction revenues over the next year come in at $1.4 billion or $2.5 billion, “the amount of available funds is less than $1 billion in discretionary funding,” Wieckowski said. “We’ve had members’ requests of $3.5 billion. We’ve had probably another $2 billion that came in today in public comment.”

He said the panel would prioritize those that are the “most cost-effective” and those that have multiple benefits.