04/17/2012 12:26 pm ET | Updated Jun 17, 2012

Is Cap and Trade for Pet Projects or for Transformation?

On April 20 the UCLA Law School is hosting a symposium called "California's Billion Dollar Question" to discuss the state's priorities in allocating the billions of dollars expected to flow once the cap and trade program under AB32 commences around November of this year.

The symposium will also address the legal constraints on allocating these revenues, especially "Sinclair Paint," named after the landmark legal case Sinclair Paint Co. v. State Bd. of Equalization. In Sinclair, the California Supreme Court reviewed a fee levied by the state on lead paint to address lead poisoning in children and environmental contamination. The Court held that permissible fees must not exceed the reasonable cost of regulation. If "excess fees" are used for "unrelated revenue purposes," such as generating general revenue, then it becomes a tax, and if not passed by a 2/3 majority, then the fee may be invalid.

The UCLA report applies this Sinclair Paint test to various ways of using AB32 fee revenues. If the use can be seen to further the purposes of AB32, then it is deemed less risky. Here's what the report says about the Cap & Dividend approach:

Can auction revenues be used to provide direct, per capita, equal-share rebates to all taxpayers as a dividend on auction revenue?

Analysis: High risk.

A court may see money spent on projects unrelated to GHG reductions as failing to further AB 32's central regulatory purpose. It is hard to see how an equal-share, lump-sum dividend to all taxpayers furthers AB 32's stated goals. A better, though still not risk-free, approach would tie targeted rebates to one of AB 32's explicit goals, such as the avoidance of disproportionate impacts on low-income communities.

This analysis of dividends as high risk corresponds with many environmental groups' belief that AB32's purpose is only to reduce emissions, as measured in tons CO2. End of story. This would make perfect sense if all we had to do was reduce emissions, and we're done. But there's more to it than that. For California to meet its AB32 goals, the state will need to do more than just tinkering with its energy and transportation systems. The only way to address the climate crisis, reduce emissions, or successfully implement AB32 is to also address broader issues at the same time: 1) changing our relationship to the Commons, 2) creating an equitable economic model for sustainability, and 3) maintaining political support for a cap over several decades. These are essential prerequisites to being able to reduce emissions as envisioned in AB32.

Further, if the atmosphere is common property in which we all share ownership, then dividends represent compensation to all Californians for harm and constitute payment for services. This may be done in such a way that there is no "excess revenue," no funds touch the State General Fund, and every Californian has a stake in climate protection and develops a positive view on carbon pricing.

For those who worry that invoking the Commons, economic equity, or political support is beside the point, AB32 explicitly requires that the Air Resources Board:

  • Design the regulations in a manner that is equitable;
  • Maximize additional environmental and economic benefits for California;
  • Consider overall societal benefits, including reductions in other air pollutants, diversification of energy sources, and other benefits to the economy, environment, and public health.

All of those mandates may be accomplished with dividends.

Thus far, Governor Jerry Brown has proposed using the revenue for programs in four areas: clean and efficient energy, low-carbon transportation, natural resource protection, and sustainable infrastructure development. He went on a radio show and mentioned directing funds towards the controversial statewide high speed rail project. While the UCLA study deems dividends very risky, it rates high speed rail a low to medium risk. But it is risky in other ways.

"Cap and Rail" could become a rallying call for the political opposition to the program. Even moderate Republican Assemblyman Cameron Smyth refers to it in an article in the Point Carbon newsletter. Opponents could easily tar cap and trade as another funding source for pet projects and boondoggles, nullifying the free-market political appeal that a market mechanism has over more blunt (even if effective) regulations or carbon taxes. It raises questions about whether the state should be linking annually fluctuating cap and trade revenues to long term transportation and land use infrastructure whose emission reduction benefits will take decades to manifest. If big projects are selected as the way to go, will ARB use cost effectiveness criteria as required by AB32? Or will the Governor just refer to projects he likes, and the money will start flowing?

Thus far, several bills have been introduced in the California State Legislature to appropriate Cap & Trade revenues. These include:
AB1532 Perez,
AB2404 Fuentes,
SB1572 Pavley, and
SB 535 DeLeon.

If cap and trade is just a pet project free-for-all, then this legislative session should provide a lot of fodder for opponents of the program. But if it can be made into a tool for reshaping our relationship with the Commons, creating economic equity, and fostering broad (even bi-partisan!) political support for a carbon price, then some of those bills should include dividends in their preferred use of revenues.