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Climate Dividends: California's Chance to Change Hearts and Minds

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With a few billion dollars on the table, the California Air Resources Board (ARB) hosted two stakeholder panels last week about how the state should plan to spend the revenues generated by the cap and trade program the developed under the state law AB32. Following the panels, ARB opened another public comment period meant to inform a proposed expenditure plan that Governor Jerry Brown's office (presumably with input from the ARB and the Department of Finance) would send the State legislature as part of the state budget process.

The panelists at the May 24 event expressed support for local government programs, research and development, and projects in sectors such as energy and water, transit, environmental education or health studies in disadvantaged communities, and natural resources such as urban forests or in the Bay Delta. Suggestions often conflicted as one speaker recommended focusing on "shovel ready" programs and the next on long-term research and development.

The only real limitation on the extensive laundry list of pet projects was the perceived risk of whether the project will withstand legal scrutiny under the precedent of the "Sinclair Paint nexus," which in this case means that revenues must advance the objectives of AB32. The group Next 10 has issued a report on this subject, referring to a recent UCLA report as well.

These reports concluded that projects resulting in direct GHG reductions are most likely to be seen in court as advancing the objectives of AB32. Next in line are expenditures that accomplish the additional goals of AB32 relating to equity, and maximizing additional environmental, economic, and overall societal benefits. For some reason, the UCLA and Next 10 reports considered those additional goals to apply to expenditures in environmental justice communities, but overlooked how they could apply to universal dividends. The reports also presumed that the state legislature would be unable to pass any bill that allocates revenues with a two-thirds vote, even one that gives money to three-thirds of Californians. As a result, their analyses see big projects such as high speed rail (aka "cap and rail") as low risk, but returning funds as dividends to the public as high risk.

The problem with this legal, but not holistic, approach is that multi-billion dollar infrastructure projects could easily swallow up all the revenues from cap and trade, yet still be unable to return GHGs to 1990 levels by 2020. Investing solely in such projects will not broaden bipartisan public support for a continuously increasing price on carbon. Big projects will not counter the attack that a carbon price is a regressive tax. Spending the public's money just on projects won't do it. The State needs to use public money to mobilize private money, and it needs to get climate change and carbon pricing into the public's brains. It can do this by addressing the psychological, economic, justice issues that override climate change in the minds of most people.

A helpful way to think about this is to reclassify climate change, not as an environmental problem with the familiar imagery of polar bears, melting ice caps, drought, floods, etc. but instead to think of climate change as a:
1) Psychological problem
2) Economic problem
3) Justice problem
In this reordered perspective, natural resource issues would be fourth in line.

From a psychological standpoint, society needs to understand what type of problem climate change presents. CO2 is not the same as other air pollutants. It is ubiquitous throughout the economy. Individuals need to understand why climate change deserves to be in a separate category from other social issues. People want to protect themselves, so they need to be reassured that solutions will not harm them or their families. They need to move beyond insufficient individual actions (i.e., shorter showers) and they need regular reminders to generate interest in fundamental institutional change. The State can help the public make these connections. Otherwise, they will support wrong solutions that make them feel good, but there will be no meaningful carbon price, and no meaningful GHG reductions.

The economic problem is partly a communication problem. Big infrastructure is visceral, while charts of supply and demand are abstract. However, to address climate change, society needs an invisible hand to encourage low carbon activities, make externalities more expensive, and provide a price signal for remaking our electricity and transportation systems. A key concern is if the costs fall on consumers, or if they are perceived to do so, it could result in an anti-tax revolt like California's Prop 13 and set back efforts by decades. ARB and state legislators should take care not to spend cap and trade revenues in a way that results in an anti-tax backlash.

The justice problem is that the emitters are often the highest income individuals (people with private jets) and institutions (Exxon Mobil), but those that feel the greatest impacts are middle class and low income both within the US and also internationally. The moral basis for distributing proceeds of a sale of pollution rights to the Commons must be grounded in justice and equity, and the simplest formula to accomplish this is a per capita dividend.

Which potential uses of revenue address the psychological, economic, justice issues described above?

Dividends: yes.
The laundry list of projects: no.
High speed rail: no.
Tax cuts: no.
Reducing the state's budget deficit: no.

The State of California is desperate for revenue. But so are the people of California. The good news for state legislators is if they do it in the right order, they can get both by sending the money directly to the people with dividends, and making it taxable. This would result in a portion coming back to the state, free of the Sinclair restrictions. However, if the money is spent on programs first, then the public will see climate change as one more budget item, floating in a sea of eroding social services. The state can still seize this prime opportunity to create a revenue-neutral program that reimburses the public for their share of revenues from the Commons. At the same time, it would create a new psychological, economic, justice framework for understanding that the solution to climate change is a carbon price that rewards the people of California.

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