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California lawmakers last month cemented their commitment to dramatically reducing the state’s carbon emissions, passing a pair of bills (SB 32 and AB 197) that collectively extend the program by a decade and give the Legislature more oversight over the agency tasked with carrying out most of the plan. But lawmakers rebuffed Gov. Jerry Brown’s (D) request to also extend the state’s nascent cap-and-trade program, which requires polluters to buy “allowances” to pay for the emissions they create, a rejection that leaves the program’s long-term fate uncertain and sets up a potentially nasty ballot fight for the governor in 2018.
That uncertainty over cap-and-trade is already having a negative impact on state coffers. Although the program has raised nearly $4 billion since its inception in 2013, growing concern that the program will not be renewed when its original authorization expires in 2020 has caused the market for allowances to plummet. The Brown administration has projected the auctions for those allowances would continue to raise approximately $600 million per quarter; the last two have raised only $18 million combined. Worse, almost all of those sold were “consignment” allowances that had been given to utilities. The state sold only about one percent of its own allowances.
That loss of funding could have major impacts on emissions reductions programs all over the state. By law, 60 percent of cap-and-trade proceeds must go toward programs like public transit, affordable housing and other sustainable community measures. That includes Brown’s ultimate pet project, the nation’s only high speed rail system. With no new federal funding for it anywhere on the horizon, Brown is counting heavily on cap-and-trade revenues to fund the controversial project.
There are multiple reasons for the turbulence surrounding cap-and-trade. For one, it appears the system is doing what it is ultimately designed to do – reducing California’s GHG emissions. The state is clearly on target to meet its initial goal of reducing those emissions to 1990 levels by 2020. While the cap-and-trade program is only part of a broad array of GHG reduction efforts, the industries covered under its mandates have consistently produced pollution levels well below their legal allowances. And as polluters pollute less, their need for buying allowances also diminishes.
There is also a major legal question to be resolved. The California Chamber of Commerce and other business groups have challenged the system, arguing it constitutes a tax that requires two-thirds majority approval from lawmakers, something the original climate reduction measure – 2006’s AB 32, signed into law by then Gov. Arnold Schwarzenegger (R) – did not have. The suit, based on the state’s historic Proposition 13 ballot measure, has wound its way through the system for years without much resolution. But that potentially changed in April when a federal appeals court seemed to imply it was leaning toward ruling in favor of the plaintiffs.
But what happens if it does? Does that mean the revenue-producing portion of the cap-and-trade program goes away? If so, how will it impact the state’s efforts to meet its stringent GHG reduction goals? Or, for that matter, those of the two Canadian provinces – Quebec and Ontario – that have partnered with California’s program?
Like the system itself, the answers are complex. A loss of cap-and-trade revenue would undoubtedly be a massive blow to the Brown administration, and could possibly derail not just his high speed rail dream but a plethora of other emissions-reduction programs statewide. But the California Air Resources Board (CARB) would almost surely appeal a negative ruling, dragging the case out even further and delaying such a fate for an undetermined amount of time. Jon Costantino, a senior advisor with Manatt, Phelps & Phillips in Sacramento, says even a ruling ultimately in favor of business interests wouldn’t kill the program because it only addresses allowances that are sold through state auctions. Many of the allowances are actually given away to utilities and others industries, while others are traded by companies themselves on the open market. That would not change. Such a ruling could merely prompt lawmakers that support cap-and-trade to seek a two-thirds vote on legislation that specifically authorizes the program.
That hardly seems likely as of now. Democrats – who have been the major proponents of GHG-reduction programs like cap-and-trade – do not currently have a legislative supermajority that would theoretically give them a two-thirds vote. That could change after the November elections, but even so such support is hardly a given. The program has never been popular among many pro-business Democrats who represent areas most economically impacted by cap-and-trade’s tenets. And lawmakers, including Democratic leaders like Senate pro Tem Kevin de León and Assembly Speaker Anthony Rendon, summarily dismissed Brown’s request for them to codify the cap-and-trade program in SB 32 last month.
Such a rejection seemed almost impossible just over a year ago, when Brown appeared capable of getting almost anything he wanted from lawmakers. But that was before the governor’s defeat last year on SB 350, a bill that would have imposed strict new targets for reducing petroleum use. The measure drew intense lobbying from the oil industry and sparked a mini-revolt from many of the same Democratic lawmakers who have voiced opposition to cap-and-trade. Lawmakers ultimately dropped the petroleum target from the measure, which then passed.
“Jerry Brown has always been about big ideas,” says Barbara O’Connor, Director Emeritus of the Institute for the Study of Politics and Media at the California State University in Sacramento. “But big ideas cost big money. And he clearly doesn’t have the same power with lawmakers as he has had in the past. They are actively questioning him more than ever before, and they increasingly have big questions about whether these are the right solutions for California right now.”
Brown’s request to codify cap-and-trade beyond 2020 ironically runs counter to his own stated belief that the agency has the power to continue the program without lawmakers’ specific consent. CARB also appears convinced it has the power to act on its own. While Republicans and the state’s Legislative Council Bureau both contend that neither the governor nor CARB has the power move ahead without legislative approval, CARB moved forward in July with draft regulations for further GHG reduction efforts that include a cap-and-trade program.
But the agency also offered four possible pathways toward meeting the state’s GHG-reduction goals, only one of which included the cap-and-trade option. Each of the three without it calls for a significant ratcheting up of other “complementary policies,” such as doubling the number of zero-emissions and plug-in hybrid vehicles required by 2030. While it technically offers the state choices, Costantino notes the proposal also clearly emphasizes CARB’s belief that cap-and-trade is crucial to hitting the state’s emissions-reduction goals.
“CARB really wants cap-and-trade,” he says. “They’re trying to show that if we don’t have it we’re really going to have to crank on cars, to crank down on industry.”
A final decision on how CARB moves forward from here won’t come until next spring. But the agency will give its clearest sign yet later this month when the board meets to discuss these options and to lay out a path for finalization down the road. Although the program’s authorization cannot end before 2020, CARB doesn’t have the luxury of waiting for lawmakers to act or even the lawsuit to play out before acting itself. The next auction is in November, and any hope of slowing the freefall of the last two likely requires that industry knows the program will last beyond that.
California companies are not the only ones anxiously awaiting a final cap-and-trade resolution. The state currently holds joint offset auctions with Quebec, with Ontario set to come on board in 2017. The province is projecting approximately $2 billion in annual auction revenue, the key element in funding what is a five-year $8.3 billion climate action plan. But given the last two joint California-Quebec auctions that revenue figure is now highly in doubt, particularly if prices and sales continue to drop. Although all of Ontario’s auction revenues for the first year stay within the province – joint auctions with split revenues between Ontario, California and Quebec don’t begin until 2018 – some observers have openly questioned why companies would buy full-priced Ontario allowances in 2017 if they can buy cheaper ones from California during that time.
The Brown administration has vowed to continue pursuing an official cap-and-trade extension by whatever means available, including a possible ballot measure in 2018. In a statement after the most recent auction, Brown advisor Nancy McFadden cited the poor results as proof that industry needs “certainty” about the program.
“Shoring up the cap-and-trade program — either through the Legislature or by the voters — will provide that certainty,” she said.
If there were any hard feelings between Brown and legislative leaders over SB 32, they got over it last week. On Wednesday, Brown, de León and Rendon announced they had reached an agreement on allocating $900 million of the $1.3 billion in already accumulated cap-and-trade revenues. Whether that leads to further agreements on the program’s future remains to be seen.