Will Cap and Trade cure California’s deficit?

May 18, 2012 - By admin

May 18, 2012

By Wayne Lusvardi

California voters may soon ask themselves: “Why vote for an $8.5 billion sales and income tax increase in November 2012 if Cap and Trade is going to raise $50 billion to $100 billion for state discretionary spending? That’s $6.25 billion to $12.5 billion per year from 2012 to 2020.

But will Cap and Trade generate enough revenues, and can those revenues be used to bailout the state general fund deficit? That is the proverbial $16 billion deficit question.

Cap and Trade is a program authorized in 2010 under Assembly Bill 32, the Global Warming Solutions Act of 2006.  AB 32 requires excessive air polluters to buy emission permits in an auction from those industries and utilities that pollute less than their pollution quota. The rules of Cap and Trade apply first to large industries; and by 2015 to utilities, including local municipal water and power departments. Eventually, 360 industries and utilities will be subject to Cap and Trade rules.  Where the proceeds of these auctioned permits are to be spent is still to be determined.

California legislators have already started floating up a flurry of bills to divvy up the estimated $50 to $100 billion windfall from 2012 to 2020 from Cap and Trade auctions. This is addition to Gov. Jerry Brown’s notion to fund the cost of the California High-Speed Rail Project with Cap and Trade funds. The California Legislative Analyst’s Office has recommended against this proposal because the funding is too speculative.

Cap and Trade Fund Distribution Bills

Assembly Bill 1532, sponsored by Assembly Speaker John Perez, D-Los Angeles, would deposit Cap and Trade pollution permit monies into a new Greenhouse Gas Reduction Account to be controlled by the California Air Resources Board.

Senate Bill 535, sponsored by State Sen. Kevin de Leon, D-Los Angeles, would divert some of the Cap and Trade auction funds to disadvantaged communities, affordable housing, hospitals and schools.

Senate Bill 1572, the AB 32 Revenue Investment Plan, sponsored by State Sen. Fran Pavley, D-Los Angeles, devises a strategic investment plant to distribute Cap and Trade proceeds.

AB 2404, the Local Emissions Reduction Fund, sponsored by Assemblyman Felipe Fuentes. D-Arleta, would delegate the award of Cap and Trade monies to the Strategic Growth Council — a six person cabinet level committee under the Governor’s Office.

What is the Strategic Growth Council? 

The Strategic Growth Council was authorized under Senate Bill 732 in 2008, sponsored by State Sen. Darrell Steinberg, D-Sacramento. It creates a cabinet-level committee to serve as a clearinghouse for the distribution of Cap and Trade funds.  According to the Strategic Growth Council website, a laundry list of activities can be funded: “to improve air quality, protect natural resources, increase the availability of affordable housing, promote public health, improve transportation, encourage greater infill and compact development, revitalize community and urban centers, and assist state and local entities in the planning of sustainable communities.”  But this may be a wish list more than what Cap and Trade auction proceeds can be legally spent on.

Who is on the Strategic Growth Council? 

The Strategic Growth Council is composed of six members. Five are the heads of state agencies and a sixth member is from the public.

Current Council members include:

Ken Alex, secretary of the Office of Planning and Research;
John Laird, secretary of California Natural Resources Agency;
Diana Dooley, secretaru of California Health and Human Services;
Brian Kelly, acting secretary of the Business, Transportation and Housing Agency;
Matt Rodriguez, secretary of the Department of Environmental Protection;
Bob Fisher, public member, president of the Mendocino Redwood Corporation and a member of the National Resources Defense Council, an environmentalist group.

The Strategic Plan of the Growth Council for 2012 can be found here.

Cap and Trade Auction Monies Hit Prop. 13 Snag

California’s Proposition 13, passed in 1978, mandates that any tax must be approved by two-thirds of the voters. Proposition 26, passed in 2010, added fees, charges, levies or tax revenue allocations as prohibited without a supermajority vote.

AB 32 authorized the California Air Resources Board to devise a Cap and Trade emission program. But it was only passed by the Legislature. It was never put to an election.  So we don’t know if all the bills for spending Cap and Trade proceeds are legal yet.

A number of liberal non-profit and advocacy organizations have leapt into the void and have issued quasi-legal opinions as to whether California can divert Cap and Trade funds to its operating budget, to fund the proposed bullet train project, and to a number of other programs.

Next10, a liberal non-profit public policy organization, has issued four reports on “Using the Allowance Value from California’s Carbon Trading System: Legal Risk Factors, Impacts to Ratepayers and the Economy.”

The liberal environmental policy think tank Resources for the Future has issued a report, “The Variability of Potential Revenue from a Carbon Tax.”

Both reports tend to concur that Cap and Trade auction revenues cannot be used for unrelated programs or reduced tax rates.  If California used Cap and Trade proceeds for ineligible activities. it would be vulnerable to a legal challenge under Prop. 13 and Prop. 26.

Some Cap and Trade proponents claim that pollution credits or allowances are not taxes, but a fee. But Prop. 26 forbids imposing fees without a supermajority vote.

The University of California Berkeley’s Center for Law, Energy and the Environment, which prepared one of the four reports for Next 10, concluded that channeling Cap and Trade funds to projects that reduce or lessen greenhouse gas emissions is the least legally risky option. The center made four conclusions: 1) re-directing Cap and Trade proceeds back to electricity ratepayers could offset all the costs imposed by Cap and Trade; 2) the way in which Cap and Trade proceeds are re-directed back to ratepayers will affect the efficiency of the program; 3) if electricity bills are reduced by Cap and Trade credits, that may affect the political perception of the program; and 4) electric rate increases will result from other AB 32 policies — namely, the 33 percent renewable power requirement – and these costs may be substantial and occur independently of the Cap and Trade portion of AB 32.

A flaw in this report is to assume that there will be no transaction costs for administrating and monitoring Cap and Trade.  Not all costs will be returned to ratepayers. And if they were, ratepayers might ask: Why implement the program in the first place?

In a 2009 report, David Roland-Holst, a professor of resource economics at the Berkeley center, said Cap and Trade revenues must be returned to utility customers either in the form of rebates or subsidized electricity bills.  Holst said that home energy efficiency projects generate more Gross Domestic Product and employment growth.

There are several problems with this proposal.  Newer homes have been built to Title 24 Building Energy Efficiency Standards and would likely not require any energy efficiency work.  And large numbers of older housing stock have been retrofitted with energy efficiency improvements either as a condition of home remodeling permits, or have been retrofitted with state, federal, and public utility energy efficiency programs that started around the mid-1970’s.  Another problem is that any subsidized home energy efficiency loans would likely end up creating another sub-prime loan and a financial bubble.

Anything that substantially deviates from reducing greenhouse gases will no doubt be tested by a legal challenge under Prop. 13 and Prop. 26.

Cap and Trade Prone to Government Gaming of System

The California Air Resources Boardhas been spending a lot of money on retaining consultants and monitors to prevent the gaming of the Cap and Trade auctions by third-party speculative traders.  But it may not be traders that would be of the most concern if the activities that can be funded under Cap and Trade are expanded beyond reducing pollution.

The California Public Utilities Commission and CARB have estimated that the proceeds from Cap and Trade auctions could total $50 billion from 2012 to 2020.  But Robert Lucas, a consultant with the California Council for Environmental and Economic Balance, is quoted in Forbes.com that if pollution allowances are held in reserve by CARB for any year, the unit price per ton of reduced carbon pollution could spike to $40 or $50 per ton.  Lucas said, “we could be talking about $100 billion between now and 2020.”

This would provide a perverse incentive for CARB to intentionally withhold pollution allowances to generate revenues for greedy bureaucratic agencies seeking to perpetuate themselves with Cap and Trade revenues. California could see a return to skyrocketing electricity prices, as experienced in the 2000-01 Electricity Crisis. And where would the check and balance be for voters and electricity ratepayers if the only referees to appeal to have a stake in the system?

If Cap and Trade were allowed to directly or indirectly plug the state operating fund budget deficit, gaming bureaucrats could hide behind a “veil of the carbon market” to jack up electricity rates and inflate the price of nearly all goods.

Cap and Trade Won’t Cure Budget Deficit

It is highly unlikely that proceeds from Cap and Trade auctions can be used to reduce or cure the state budget deficit.  Politicians may be queuing up with bills full of funding wish lists.  But any effort to liberalize the eligible funding activities under Cap and Trade will be met with lawsuits as well as a possible voter revolt.

A 2010 study by T2 Associates for the AB 32 Implementation Group raised concerns about Cap and Trade taking in eight years more than 120 percent of the single year 2009-10 state budget.

But the gnawing questions remain: Why impose Cap and Trade charges at all if they just have to be re-circulated back to electricity ratepayers?  If electricity ratepayers are given home energy efficiency rebates, isn’t this just another stimulus program? And hasn’t home energy efficiency been accomplished much more cost effectively by Title 24 Building Energy Efficiency Regulations and utility company rebates since the mid-1970′s?

Neither California politicians nor bureaucrats apparently know today what to spend Cap and Trade taxes on.  The transaction costs to implement the Cap and Trade program were estimated at $8 billion by the Congressional Budget Office.  And when you factor in the complexity that Cap and Trade will add to the economy, is a tax the best solution to reducing pollution?

The experience with the California Energy Crisis of 2001 is that things won’t turn out as expected and are often much worse than leaving them alone.

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Comments(35)
  1. Bob says:

    All cr@p-n-trade will do is exacerbate all the other problems Colliefornia (as Ahnode sez) has.

    Factor in the federal tax cuts that expire next year and then add in the state and local tax increases that are coming, throw in cr@p-n-trade and next year could be an economic disaster for Colliefornia, a state that is going to the dogs, literally.

    Where I live there is no money to fix pot holes but plenty of money for 6 figure salaries for bureaucrats (we have a city clerk making over 133,000 per year), and our local political overlords have decided to build another dog park.

  2. Bob says:

    But I guess the dog park will make Rex happy.

    And next year the economy may collapse everywhere http://lewrockwell.com/orig10/galland38.1.html

  3. Wayne Lusvardi says:

    Bob
    Can you imagine sucking maybe as much as $100 billion out of the economy over the next 8 years when 2013 and 2014 are going to be very tough years and California doesn’t know where to spend the money yet?
    WL

  4. Bob says:

    Wayne, I think there is a good chance next year will be a very bad year for the economy, and California will be hit harder than most states. I think the revenue the cap-n-trade tax generates will be more than off set by the economic activity it kills.

    When you think about this issue and all the other problems California has it is very depressing. I don’t see how you guys can make a career of researching and writing about this stuff without going crazy.

  5. Rex The Wonder Dog! says:

    Combine Cap n Trade with the Bullet Train to nowhere and you understand why we have such big problems here………….

  6. Wayne Lusvardi says:

    But “let the polluter pay” they say! Someone has to be punished for human suffering. But who is a “polluter?” And “what is truth” – Pontius Pilate

  7. Bob says:

    Combine Cap n Trade with the Bullet Train to nowhere and you understand why we have such big problems here………….

    But look on the bright side, Rex. There are plenty of dog parks for canine Amerikans and illegal canines, too.

  8. Beelzebub says:

    Cap n Trade is a molehill compared to all the other scams and bezzles are are happening in our society.

  9. CalWatchdog says:

    No, cap and trade is much bigger than anyone realizes. AB 32 legally mandates the government enter our homes, businesses and utilities, and regulate them however it wants. AB 32 granted CARB powers unimagined in this country. Cap and trade is just CARB dipping its big toe into the water.

    I am writing a column about how CARB calls us “the Regulated Class,” and what they have in mind. CARB needs to be stopped – it makes High-Speed Rail look like a toy train.

    Katy

  10. Rogue Elephant says:

    Every dollar taken for cap-and-trade is a dollar taken from the real economy. Every dollar spent on cap-end-trade is a dollar not spend on goods and services. This shrinks (not grows) the economy, destroys businesses and jobs.

    Our only hope is that Romney is elected, the GOP takes the House and Senate, and they strip both California and the EPA of power to regulate CO2 as a pollutant – fat chance of that happening!

    Alternatively, the feds should pass a law allowing a private right of action to challenge agency rulings based on flawed science.

  11. Beelzebub says:

    “No, cap and trade is much bigger than anyone realizes”

    Just give us the facts, Katy.

    How much is cap n trade going to cost us???

    Illegal immigration costs California $20B plus a year. Yet I never read anything about that here @ CWD. Why?

  12. Beelzebub says:

    I just read that Old Jerry Clown underestimated the deficit amount. He claimed we are going to collect $1.8B in redevelopment money in the near future. The LAO says that’s not even close to being true and that we can add another $900M to the $15.7B MISESTIMATED deficit. That will but us near $17B. And I bet it rises to over $20B by election time!!! ;)

    Old Clown seems to be math challenged, eh??? He needs to go take some remedial HS math classes. He couldn’t estimate the number of corners on a triangle!!! :D

  13. Barb says:

    Well….if Cap & Trade might not pass the muster to pay for the monstrous deficit the state is in, here is one way they might find money to close their deficit gap:

    http://blogs.sacbee.com/the_state_worker/2012/05/private-sector-retirement-savings-bill-set-for-california-senate-committee.html

    They stop at nothing!

  14. Ulysses Uhaul says:

    You won’t cough, but you won’t eat either!

  15. eqauloportunityoffender says:

    All this $$$ we pay these stoooopid politicains and they can’t even count correctly, 9Billion………ooops, I counted wrong, it’s 16Billion.

    They’re either really that stoooopid or this was used as a scare tactic.
    IMHO I think both!

    Cap n trade won’t even scratch the surface. They’ll find loopholes.

  16. Ron Kilmartin says:

    In the end it is another bill (tax or fee or inflation) that is coming out of Joe and Jane Sixpacks’ incomes. And it will all go to some Brown or green boondoggle with no real economic benefit except to a handful of greensters.

    True to the Agenda 21 governance concept, we see that all the executive power is concentrated in a Soviet-style unelected council, and the sole “public” representative is from one of the fruitcake NGO enviro-nazi groups. Oh he will be defending the public alright!

    Most articles I have seen on this subject (written by AB 32 proponents)give the impression cap and trade is a fine levied on the dirty oil or whatever industries. This article is one of the few I have seen that correctly identify Joe and Jane Ratepayer as the folks who are going to get socked in the billfold by AB 32, in addition to their current tax burden.

  17. Bob says:

    This is dedicated to all of our wonderful government masters. We love them all…

    http://www.youtube.com/watch_popup?v=5u03KAcEbEo

  18. Rex The Wonder Dog! says:

    Bob-Funny video

  19. Wayne Lusvardi says:

    If history is any guide California will manufacture another crisis when it is opportune and then go to the courts to circumvent Props 13 and 26 to tap the proceeds from Cap and Trade to meet the crisis.

    The prospect of government gaming of Cap and Trade auction prices if CARB gives out too few pollution allowances and the courts permit auction monies to be spent at political whim is the most troublesome aspect. If this comes about when government revenues decline due to economic cycles then CARB could suck more from the private sector and then hide behind the so-called actions of the “market.” Even Dorothy’s dog Toto could see behind that kind of curtain to see the machinations behind the scenes. Right now they apparently don’t know where to even spend the money but to absurdly return it to the ratepayers they confiscated it from. What Cap and Trade is ending up to be is one giant way to socialize the higher costs of green power so that average electric ratepayers are not disproportionately hit with higher power bills. The impact will hit in 2015 when local water and power departments will have to pay Cap and Trade taxes.

  20. Ulysses Uhaul says:

    Stop hacking and coughing!

    Republicans can’t sleep!!!!

  21. Bob says:

    I think you are right, Wayne. This is just one more slush fund for these criminal politicians. And consumers and taxpayers are going to get screwed.

  22. Bob says:

    And how are you boys enjoying your $4.50 a gallon Colliefornia gasoline?

    And just wait until cr@p-n-trade kicks in.

    I know Obammie is doing everything he can to push down oil prices before the election but let’s face it. It won’t matter in Colliefornia. The price of gas could be $100 a gallon and he’d win Colliefornia in a landslide.

  23. Beelzebub says:

    “And how are you boys enjoying your $4.50 a gallon Colliefornia gasoline?”

    Think about this for a minute. Crude has dropped by about $15/barrel. Yet gasoline remains at it’s highs @ $4.42 for regular. And the price is going higher as the summer months approach. Look back over the last 10 years. Gas prices ALWAY go up in the summer months. Don’t they tell you that when oil prices fall – that gas prices are supposed to fall too??? Ooops. So crude fell by $15 ($109 to under $94 (current) per barrel) and gas stays at it’s highs for the last 6 mos. :D Oh, are you going to take the bait and believe that “speculation” BS??? heh. It’s ALL politics. When gas goes higher you pay more in state and federal taxes. It’s an easy way for the pols to raise your taxes without having to cast a vote.

    But Kingfish Obama has a problem. Last poll I saw Romney was leading. I’ve talked to people at the gas pump. They’re livid. Look, if you drive 50 miles a way (round trip) to work @ $4.40/gal that’s over $10/day just for work. $50/wk. $250/mo. Now throw in all the miscellaneous errands and such. $400/mo EASY! $5000/year just on GASOLINE!!! AND THE PRICE IS GOING HIGHER!!! heh. :D

    Ok, let me make a prediction. Prior to the presidential election Israel will launch a missile attack on the Iranian nuke plants. This is an automatic overnight 5% approval ratings hike for the long-legged mac daddy. He will give Israel approval to strike while publicly keeping a safe distance. If it turns out well – Obama will take credit. If it goes badly he will blame Israel. We all know that the government manipulates the price of gas. Obama will dip into the strategic oil reserve (used for emergencies) to stabilize the price of gas. He will look like a hero. This will give him the advantage doing into November. Once reelected, he will break his promises to cut military spending and he will continue to add $trillions$ to the national debt. And eventually all illegals who violated our immigration laws who reside in America will be given blanket amnesty by the presidential executive powers!!! heh. Keep your eye on him. He’s a master flim-flam man who is about to pull a big fast one on ya!!!

    He might fool you. He doesn’t fool me!!! :D

  24. Bob says:

    I tell ya, Bub, Obammie doesn’t fool me. Not for one second.

    When it comes to politics, the sh*t rises to the top.

    Imagine the worst, most vile thoughts about these politicians and then multiply by 1000 and that’s what they are.

    You must be a liar, a thief on a grand scale and be willing to slaughter millions to be the nominee of either one of these two criminal parties.

    These people would sell their mothers to the devil to get elected Imperial President.

  25. Beelzebub says:

    “When it comes to politics, the sh*t rises to the top”

    Yet they fool the masses with the myth that we are in charge with our votes. The more I watch the manipulation and political games that go on – the more I disbelieve that the people have the final say. Look at Sactown for instance. The overall approval rating for the state legislature near single digits. Yet in 2010 every single incumbent was reelected. Put on your adult thinking cap. Does that make any sense to you, Bob? Or does that fly in the face of logic and reason? That proved to me that the entire system is gamed. You see, they MUST make us believe that we are in charge – otherwise they could no longer fool us with the false claim that we live in a ‘democracy’. They would have to admit that we live within an oligarchy where those in power (electeds and unelecteds) rule us. And that would totally contracdict what they taught me and what they continue to teach all the little school children in civics class. I don’t have a child in elementary school – but if I did I would make certain that he or she was not brainwashed with textbook propoganda. I would tell him or her how the world really works (in child terms) and encourage him or her to question the teacher. And if he or she got a “D” in the class I would praise him or her as if he or she were the center of the universe. There could be no greater lesson in life than that.

  26. Ulysses Uhaul says:

    Turn your head and cough or pack and ship!

  27. Beelzebub says:

    “Turn your head and cough or pack and ship!”

    You’re probably right. To stand and fight you’d be stupid. The leeches would just run you over with their numbers.

    The best bet is to pack and ship if you are able to. Some people can’t. Look at those who are underwater $100,000 or more on their mortgages with recourse loans. Anyone who has refinanced as a general rule has a recourse loan. They are stuck. And there’s a boatload of them out there. You’ll never get repaid by the Too Big To Fails – but if you have a recource loan they can follow you for a long, long time to collect.

  28. Hondo says:

    Kalifornia doesn’t have the time to wait for the cap and tax money to come in. The deficit is to big and will only get bigger next year. LA’s deficit, by their best pie in the sky estimates, will be 1 billion in another year. The stock market is down because Europe is in another BIG recession and that affects our country’s economy. That means the returns on the public pension funds are going the wrong way.
    Kalifornia is bankrupt today. LA is bankrupt today. The time to go chapter 7 is here. My beloved state will end up in kaos in another year if they don’t do it now.
    There is no more tomorrow. Tomorrow is here.
    Hondo

  29. The Ted Steele System says:

    Man there are alot of ultra right wing kooks out here spooning. Mmmmmmmmmm

  30. Beelzebub says:

    “Man there are alot of ultra right wing kooks out here spooning”

    Anybody who tells the truth is right-wing to you. :D

  31. Ronald Stein says:

    An increase in our costs for transportation fuels and energy, and a tax increase may be the quick attempt to fix the deficit, BUT it may increase the deficit rather than decrease the deficit.

    California spending continues to increase each year, concurrently while CA continues to experience a net out migration of businesses and citizens. Thus, unrealistic income projections from a diminishing pool of businesses and employed citizens will require even more taxes on the few left to pay them.

    With more taxes to cover the constantly increases in spending, it presents a multiple choice question:
    a: Will a tax increase help attract businesses into CA and help us retain the ones still here and incentivize small businesses to hire and reduce unemployment, OR
    b: Will it provide fuel to continue the exodus, resulting in fewer businesses and less workers paying taxes and thus increases the unemployment and the deficit?

    At some time in the distant future, maybe our elected officials will learn that a business friendly state is better for the economy than an over regulated state. A business friendly state would have a positive impact on lowering our unemployment, currently among the highest in the country. The Chief Executive Magazine, ranks California as the worst state for business based on 500 CEO’s that considered a wide range of criteria from taxation and regulation to workforce quality and living environment.

    Increasing the number of employed citizens in a business friendly state would generate revenue, rather than an enrgy tax and an income tax that would most likely increase unemployment.

  32. Beelzebub says:

    Yes, Ron. The productive are fleeing Ca. However, the state population continues to grow only because illegals are flooding the borders and reproducing like rabbits in our hospitals giving them not only the right to stay – but the right to free housing. food and medical care from citizen taxpayers.

    How do you think that will work out long-term, Ron?

    Do you think that is a winning strategy for prosperity?

    Have you ever wondered why the media (and even the blogs) refuse to address this problem like I do, Ron?

  33. Ted Steele, Beet Framer says:

    Actually Beezyboob you need to keep up– the undocumented are not coming in the vast amounts of yesterday. Sorry for your narative.

  34. Beelzebub says:

    “Actually Beezyboob you need to keep up– the undocumented are not coming in the vast amounts of yesterday”

    Prove it.

    Are you going to link Dailykos or some La Raza blog article now???? :)

    I am almost embarrassed to discuss adult news topics with you. It’s as if I am conversing with an 8 year old. But I must admit. It is fun to bounce you around! :)

  35. The Ted Steele System says:

    wow beezyboob—- Dailykos??? Don’t you read the posts out here? LOL

    http://www.calwatchdog.com/2012/05/21/american-dream-goin-south/

    Please get someone to read the link to you……there there,,,tut tut…..

    The Ted.

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