This commentary originally appeared in Forbes on March 2, 2017.
For the fourth time in a row California’s cap-and-trade auction for greenhouse gas emissions fell flat, raising only $8.2 million out of a hoped for $600 million, leaving revenues $1.9 billion short over the past 12 months.
California Gov. Jerry Brown has big plans for these cap-and-trade revenues, with about a third of the funds raised earmarked for the California High Speed Rail project. The auction shortfall will be taken from the general fund budget, diverting dollars meant for public education, welfare, and retired state worker pensions.
In reaction to an auction that raised little more than 1 percent of its expected revenue, California Senate President Pro Tem Kevin de León hinted strongly at ditching cap-and-trade for a straight up carbon tax, saying California government needs, “…a program that both reduces pollution and provides stable funding to clean up climate emissions.”
In addition to its weak revenues, the state’s cap-and-trade auction law is on shaky ground legally. The California Chamber of Commerce and a tomato processing company are challenging the law, claiming it functions as a tax, not a fee.
In California, taxes have to be approved by a two-thirds legislative supermajority, fees, only a majority. But, fees can only equal the cost of the program they support. The cap-and-trade program looks, acts, and functions as a tax, thus, the legal challenge.
Gov. Brown would prefer the law to be reauthorized with a two-thirds vote to remove the legal challenge, but, given the weak returns from recent auctions, the legislature might well just drop the fiction and pass an undisguised carbon tax, though passage wouldn’t be guaranteed.
Democrats outnumber Republicans by more than two-to-one in the Assembly and the Senate, but, if all Republicans stood firm and voted against a carbon tax, a high likelihood, there’s a change that a few Democrats from centrist districts would balk, putting the new tax in jeopardy. Only one Democrat senator holding out could stop the tax; in the 80 member Assembly, only two members from the majority could halt a carbon tax.
Generating tax revenue for Gov. Brown’s high-speed train wouldn’t be the carbon tax’s only objective, contributing to the state’s ambitious carbon reduction goals would also be key. On January 20, the California Air Resources Board published its draft strategy for reducing greenhouse gas emissions 40 percent below 1990 levels by 2030. The plan is so aggressive that even if all California cars, trucks, buses, trains, ships, and aircraft—accounting for 37 percent of carbon emissions—ceased operations, the 2030 emission target still couldn’t be reached. Further reductions planned for 2040—less than a quarter of current emissions—approach the realm of the fantastical.
California’s Environmental Justice Advisory Committee helped develop this carbon-free fever dream, with taxpayer-funded social justice groups and history Ph.D.s working alongside earnest bureaucrats and government contractors to develop a 30-year plan, something even the nomenklatura of the former Soviet Union would have thought too imperious to attempt.
The main contribution of the Environmental Justice Advisory Committee is likely to come soon after the implementation of the carbon tax however, in the form of greater wealth distribution via California’s utility bills. As the cost of electricity, water, and natural gas goes up with the carbon taxes, the Environmental Justice Advisory Committee will lobby to increase the surcharges on utility bills for the middle class and business to subsidize the poor, thus shielding them from some of the committee’s policy recommendations.
At the recent carbon dioxide auction price of $13.57 per metric ton, California’s greenhouse gas reduction goals could raise about $6 billion a year at their start, greater revenue than raised by California’s motor fuels tax. Of course, pressure would immediately mount to increase the carbon tax regardless of its success in lowering emissions. If carbon emission reductions proved elusive, calls to increase the carbon penalty would follow. Alternatively, in the unlikely event that carbon emissions started on the steep downward path California’s planners want, there would be inevitable calls to increase carbon tax rates to maintain revenue levels.