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California Removes Cap-And-Trade Expenditure Plan From 2017-2018 Budget

On May 31, 2017, California’s Budget Bill (AB 96) was amended to remove the $2.2 billion Cap-and-Trade expenditure plan (C&T Plan) proposed by Governor Jerry Brown in his January Budget. Previously, the bill was drafted to appropriate funds to the C&T Plan contingent on an approved an urgency bill to overcome current legal challenges to the fees collected and disbursed under the Greenhouse Gas Reduction Fund. The provision has now been altogether removed and the C&T Plan is being pursued separately by the California Legislature.

In 2012, California legislation authorized the appropriation and expenditure of the state’s Cap-and-Trade auction proceeds will be appropriated and expended. The legislation established the Greenhouse Gas Reduction Fund (GGRF), where the state’s portion of the proceeds is deposited. The statutes require that the GGRF allocations be used to facilitate the achievement of greenhouse gas emission reductions and, where applicable and to the extent feasible, to further the additional goals of the Assembly Bill 32, the California Global Warming Solutions Act of 2006. The statutes also require that a portion of these investments benefit disadvantaged communities.

In January 2015, Governor Brown adopted an Executive Order establishing a reduction goal that the state further cut 1990 emission levels by 40 percent by 2030 through decreases in petroleum use, increases in renewable energy, and energy efficiency. Governor Brown’s administration was active in promoting state and international climate policies, including negotiating a memorandum of understanding with nation states to commit to take actions at home that will keep temperature increases below 2 degrees Celsius and helping pave the way to a successful climate conference in Paris at the end of last year.

The Cap and Trade Program proceeds from the May and August 2016 auctions were significantly lower than prior auction revenues, at $10 million and $8 million, respectively. The state attributes these low numbers to uncertainty about the Cap-and-Trade Program past 2020, under current legislative authorization. The uncertainty is further fueled by pending litigation over whether AB 32 authorized the Cap-and-Trade Program past this date. In early January, Governor Brown promised to work with state lawmakers to introduce and pass an urgency bill that would remedy the uncertainty in the cap-and-trade program. Within days, state assembly members introduced AB 151, expressing the Legislature’s intent to introduce legislation this year that would authorize the Air Resources Board to utilize a “market-based compliance mechanism” (e.g., cap and trade). AB 151, or its successor bill, has the potential to remove the uncertainty that produced these low numbers, but must pass with a two-thirds vote. This purpose of AB 151 was recently transferred to new legislation, SB 775, discussed further below.

In September 2016, Governor Brown signed into law SB 32 and AB 197. SB 32 codified the provision in the January 2015 executive order that the state reduce greenhouse gases by 40 percent by 2030. AB 197 gives more teeth to this directive, using statute to prioritize certain industries for the greenhouse gas regulation. On January 23, 2017, the California Air Resources Board released an updated version of the Proposed Scoping Plan (PSP). The PSP incorporates SB 32 and also includes a measure for regulations of refineries consistent with the passage of AB 197.

The C&T Plan proposed expenditures of $2.2 billion on 18 climate programs, spread over seven investment categories. Approximately 60 percent, or $900 million, of projected auction proceeds was earmarked for continuous appropriation projects such as California’s high speed rail project and the affordable housing and sustainable communities program. The remaining $1.3 billion was intended to fund the Governor’s proposed Transportation package, California Department of Transportation’s Active Transportation Program, and the California State Transportation Agency’s Transit and Intercity Rail Capital Program.

SB 775 directs the California Air Resources Board to adopt a regulation establishing a compliance mechanism of “market-based emission limits” that will supersede the current cap-and-trade program, taking effect on or after January 1, 2021. The bill also creates three new funds to replace the existing GGRF and receive the auction proceeds: 1) The California Climate and Clean Energy Research Fund (CCRF), 2) California Climate Dividend Fund (CCDF), and 3) California Climate Infrastructure Fund (CCIF). The bill sets a statutorily mandated priority for fund allocation, but has not yet indicated what percentages of the auction proceeds will be allocated to which fund. The bill also institutes a so-called price collar, which sets a minimum and maximum cost for credits, likely intended to insert some certainty into the proceeds aspect of the auction, while also preventing skyrocketing prices for permits. The price collar would start at $20 and $30 in 2021, rise to $20 and $40 in 2022, and then tick up each subsequent year by $5 and $10, respectively, plus inflation adjustments. The state’s existing free credit allowances and offsets will be eliminated by the bill.

 Those interested the state’s Cap-and-Trade Program will want to track the progress of Senate Bill 775 through the end of the current session, as a 2/3 vote is needed to overcome the tax questions and implications looming over the current cap-and-trade provision.

(Kristin Garcia)