First Cap and Trade auction cuts no pollution for $233 million

Nov. 21, 2012

By Wayne Lusvardi

In the private sector, success is often likened to “selling lemonade at a track meet.” But in the upside-down public sector, the California Air Resources Board auctioned $233 million of pollution permits on Nov. 14 — and got nothing for it. Such a deal.

Pollution will not be reduced in California. Yet that was labeled a “success” by CARB Chair Mary Nichols.

Industries and public utilities bought 23.1 million pollution permits rather than reduce so-called toxic emissions.  Most people would call that a failure — unless the unstated goal is “tax farming” (private tax collection) rather than reducing air pollution.

The Nov. 14 auction was the first ever under CARB’s Cap and Trade program, which was authorized 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.

Payoffs

CARB apparently considers it a success when industries, instead of reducing pollution, pay off government.  But the definition of success should be when industries have to buy a minimum number of permits because they already have reduced their emissions.  CARB seems to meet the classic definition of a bureaucracy where the manifest function — in this case, to reduce pollution — has been surpassed by its latent function — to tax industries and public utilities.

CARB reported that the money taken from businesses will be re-circulated back to electricity ratepayers in the form of a rebate called a “climate dividend.”  But why have an auction in the first place if CARB is just rebating the monies?  This is why the state Legislative Analyst’s Office believes a pollution permit auction is not needed to accomplish pollution-reduction goals.  Why doesn’t CARB instead use its conventional regulatory powers to enforce excess air pollution?

Lawsuit

This is the basis of the California Chamber of Commerce’s recent lawsuit claiming that the auctions are “a revenue raiser” that never was authorized under the Cap and Trade law. California law mandates that tax increases must be passed by a two-thirds vote in the Legislature.

Moreover, the auction conducted last week by CARB proved that Cap and Trade is a tax. As someone who has conducted real estate auctions, I know that, by definition and by practice, an auction is the process of a sale by competitive bidding.  In an auction, whatever is being sold goes to the highest bidder.  That is not what happened at the Cap and Trade auction. Bid prices for nearly all 23.1 million permits went for the minimum bid of $10 per ton of pollution, or a few cents more in some cases.  Bidders merely paid their tax and went back to business without reducing any emissions.

Twenty five percent of the auction proceeds will go toward “disadvantaged communities” that have a high proportion of low-income residents in residential communities near polluting industries.  Air pollution doesn’t stay put in the Los Angeles Air Basin or anywhere else.  In Los Angeles County, any visible pollution is typically pushed up against the wealthy suburbs near the San Gabriel Mountains, such as Fontana, Rancho Cucamonga and Upland.

But these wealthier communities are not considered “disadvantaged” by CARB.  It is obvious to most observers that Cap and Trade auctions generate a 25 percent surtax, not rebates for electric ratepayers.

CARB conducted a “shakedown cruise” of its Cap and Trade auction. But what really happened was a tax shakedown that will be indirectly conducted through utility rates and loaded into the price of industrial goods and transportation, accomplished through this sham of an auction.