California Cap-and-Trade: Following the Money

Jessyca Sheehan, associate director, is a member of APCO’s global energy and clean tech practice.

California has now held two auctions – the inaugural in November 2012 and a second in February 2013 – for its cap-and-trade program, a key component of the state’s landmark climate change law AB 32. In both auctions, all current year allowances were sold, clearing at more than $3.00 above the floor price in the most recent auction. However, a much smaller portion of future allowances were sold (only about 15% in the November auction and less than 50% in the February auction), resulting in less revenue than the original $1 billion-plus projected by the state. That said, budget analysts still expect cap-and-trade to bring in around $200 million in revenue in its inaugural year – a healthy chunk of change.

A question remains:  what will the state do with this money?

Much of the conversation at Capitol Weekly’s Cap-and-Trade conference on February 28 was focused on how this pot of money should be divided. By law, it must go to climate mitigation measures, but the law does not specify which measures. So this question is open to much debate.  Unfortunately, there are few examples, let alone best practices that can help guide the state to ensure their investments in will pay off, a downside to being one of the only carbon markets in the world.

Some things to consider:

• There is concern – particularly among environmental, transportation and clean tech advocates – that the state will use a significant portion of the proceeds to offset the General Fund and support existing climate mitigation programs. One idea being promulgated is the creation of a Green Bank – a concept adopted by Connecticut and being discussed in several other states – to spur new innovative, clean technologies that can improve our environment.
• There is debate as to when the revenues from the first three auctions must be appropriated. Presently, no government bodies seem to agree on when this must happen.  The AB 32 Scoping Plan – originally released in 2008 – is going through a reassessment now, and some feel that allocation of resources should wait until the revised scoping plan is complete so the two can be aligned.
• With transportation accounting for 40 percent of all greenhouse gas emissions in the state, and the sector coming under cap-and-trade in 2015, many want to see funding go to smart transit and sustainable communities programs to reduce the number of polluting cars on the road.
• Enacted last year, Senate Bill 535 requires at least 25 percent of auction revenues to fund projects that benefit disadvantaged communities, with at least 10 percent going to projects physically located within disadvantaged communities. An effort has been underway at the California Environmental Protection Agency (CalEPA) and the Office of Environmental Health Hazard Assessment (OEHHA) to rank California communities according to environmental health impacts. These rankings will undoubtedly be used by policymakers as they look to prioritize programs in compliance with this law.

The next step is for CalEPA to submit a draft three-year investment plan to the legislature in April 2013. After it moves through the committee process, CalEPA will incorporate any changes and adopt a final investment plan at a public hearing. These appropriations will be included in the Governor’s May Revise budget.

Should California use auction revenues to launch new programs and initiatives to spur innovation and reduce emissions, or should we be relieving strapped state and local budgets by first prioritizing existing, high-potential climate mitigation programs?  Let us know your thoughts in the comments below.