Show Us the Money: How Will Cap and Trade Revenues Be Spent?

By Laura Tam, Sustainable Development Policy Director
May 6, 2014

Photo courtesy Flickr user Williamson

For anyone in California with a cause in search of support, the topic of cap-and-trade revenues, which are expected to reach $5 billion annually, begets breathless questions: “How much? How’s it going to be spent? Can we tap into that somehow?”

The cap-and-trade system, of course, is part of how California is implementing Assembly Bill 32, the 2006 Global Warming Solutions Act, which requires the state to reduce greenhouse gas emissions to 1990 levels by 2020, and 80 percent below 1990 levels by 2050. In brief, it works like this: The state determines how much carbon can be emitted into the atmosphere each year under its A.B. 32 goals. This amount is the “cap,” and it’s lowered by about 3 percent per year to achieve greenhouse gas reductions. The state holds a quarterly auction where it sells carbon emission allowance credits to certain high-volume polluters, who are required to hold allowances for every ton of carbon they emit, and who can also sell credits to each other. (This is the “trade.”) Revenues to the state come from these auctions. By about 2018, the program will cover more than 85 percent of statewide emissions.

There are lots of detailed explanations about how cap and trade works and how well it’s working so far (by most counts, quite well). This post looks at two proposals for how the money will be spent.

Forecasts of the total amount of cap-and-trade revenue between 2013 and 2020 vary quite significantly, from $12 billion to $45 billion. The reason for the uncertainty is legitimate: Nobody really knows the future prices of allowances (which will basically be determined by the market, within a ceiling and floor set by the California Air Resources Board). Regardless, California has already received hundreds of millions of dollars from auction revenues over the last 18 months, with that number poised to be in the billions annually within a few years, when even more sources of emissions must be covered by allowances. Though Governor Jerry Brown’s 2013-14 budget borrowed a significant amount of the program’s earliest revenues to support the state’s general fund, that money is supposed to be paid back with interest, and the delay in receiving funds has actually given state agencies and legislators time to work out how the auction proceeds will be spent.

This significant new revenue stream for the state is not a free-for-all. The California legislature has already made some decisions about how the money can be spent. For one, the revenues must be used to reduce greenhouse gas emissions and, to the extent feasible, achieve co-benefits such as job creation and air quality improvement. Secondly, 25 percent of all revenue must benefit disadvantaged communities. In 2012, the legislature directed the California Department of Finance to develop a three-year investment plan for the revenues that would meet these requirements, which it completed in 2013. The plan recommended three main categories of investment:

  • Sustainable communities and clean transportation, including the implementation of regional Sustainable Communities Strategies (as laid out in Senate Bill 375), rail transit modernization including high-speed rail, transit expansion, transit-oriented development and low-carbon or zero emission passenger transportation
  • Energy efficiency and clean energy, including residential weatherization retrofits, clean energy financing and water system efficiency improvements
  • Natural resources and waste diversion, including forest management, restoration and conservation; agricultural management; and waste reduction and recycling

With that in place, there are now two competing visions — each with an important sponsor — for appropriating cap and trade revenues in 2014-15 and beyond.

The first proposal to be released, in January 2014, was the governor’s budget, which made its biggest single commitment ($250 million) to high-speed rail, with even more significant future commitments: 33 percent of cap-and-trade revenues in 2015-16 would be appropriated to the California High-Speed Rail Authority, and $400 million of the $500 million loaned to the General Fund in 2013 would be repaid sometime in the future through a direct appropriation to high-speed rail. Other large chunks of the governor’s budget proposal include $200 million for low emission vehicle rebates, $100 million for transit-oriented development grants, $100 million for weatherization and energy efficiency in state buildings and about $50 million for fire prevention and urban forestry.

The nonpartisan Legislative Analyst’s Office concluded that there was “significant uncertainty” around whether this package would achieve greenhouse gas emission reductions and that it would be “very difficult for the Legislature to have assurance that the specific package of programs proposed by the administration would achieve the greatest reduction per dollar invested possible, or whether a different set of programs might yield better outcomes in a more cost-effective manner.” Moreover, many of the reductions the package would possibly support — such as high-speed rail — would not occur until after 2020, the target for reaching 1990 emissions levels.

As an alternative plan, last month Senate President pro tem Darrell Steinberg — sponsor of SB 375 — introduced SB 1156, which proposes to allocate revenues over a multi-year period according to two methods. First it would appropriate three fixed allocations of $200 million annually, kind of like set-asides: one for natural resource protection, one for a “climate dividend” to consumers, and one for electric vehicles. Then the rest of the revenue would be allocated among several key priorities: 40 percent for a permanent source of funding for affordable housing and sustainable communities; 30 percent for a permanent source for transit; 20 percent for high-speed rail; and 10 percent for road retrofits and complete streets. Within each of these categories, projects would be competitively ranked based on how effective they are at reducing emissions. Under the sustainable communities category, at least half of the amount must be reserved for affordable housing. In Steinberg’s bill summary, which assumed $5 billion in annual revenues, the competitive categories received much more money than the fixed; transit and sustainable communities, for example, would receive $1.3 and $1.7 billion, respectively. Of course, if auction revenues are not so lucrative, the relative share of resources devoted to transit, sustainable communities, high-speed rail, and any other category might be much less.

By including a competitive ranking process for its revenue investments, Steinberg’s bill does seem to address the legislative analyst’s concerns about the efficacy and cost-effectiveness of the governor’s budget proposal. But like the governor’s proposal, the bill seems similarly unclear about whether proposed emission reductions would occur before 2020.

At SPUR, we are devoted to many of the priorities addressed in both cap-and-trade revenue investment proposals. We care about high-speed rail, affordable housing, sustainable communities strategies (known locally as Plan Bay Area), retrofitting and weatherizing buildings and, of course, reducing greenhouse gas emissions: the core purpose of cap-and-trade itself. We will be watching with interest to see which of our many policy priorities may benefit from this substantial new revenue stream. And once it’s decided, as always, we’ll try to make sure that the Bay Area and its cities get the best bang for their buck from climate investments.