California currently has one of the most comprehensive climate change and greenhouse gas (GHG) reduction programs in the world. Bold legislation supporting the reduction of pollutants, include AB 32 and SB 32, set ambitious goals for California to rapidly transition to a green economy. While California currently has a cap-and-trade program in place to reduce GHG emissions, there are substantial legal concerns with the function of the current program post 2020. In turn, lawmakers have been scrambling to find an alternative way forward to continue meeting the state’s substantial GHG reduction targets.
Since May, progressives and environmental groups across the California have been rallying behind a groundbreaking post-2020 carbon pricing bill known as SB-775.
However, Governor Brown had other thoughts, deciding to give big oil a seat at the table. Brown, and supporters introduced their legislation (AB 398) on Monday to reauthorize California’s cap-and-trade program.
If the goal is to safeguard both the Earth’s climate and the health of Californians, while promoting economic security of Californian families, AB 398 falls woefully short. Not only does AB 398 represent a giveaway to polluters, largely at the expense of low- and middle-income CA households, but it will likely fail to adequately assist the state in meeting their climate goals.
Just how do the two bills diverge?
Both bills offer a basic carbon price. The idea is straightforward - the state charges polluters a fee on every ton of carbon emitted through the combustion of fossil fuels. In turn, the fee trickles through the economy, resulting in higher prices for goods based on their carbon content. For instance, the price of gas would increase about $0.20 per gallon if the state were to administer a $20 fee on carbon. Likewise, consumers would see very small price increases for other goods, such as food, which also contains carbon (think transportation costs, fertilizer, etc.) The fee sends a price signal to businesses and consumers, nudging them to consume less fossil fuels and hence reduce our collective carbon footprint.
Although these higher fuel prices are a cost to consumers, they are not a cost to the economy as a whole. Instead they are a transfer. Unlike the higher fuel prices resulting from, say, OPEC supply caps, the extra dollars paid as a result of carbon pricing policies are recycled within the Californian economy. In other words, the economic pie of California remains intact. What changes is how the pie is sliced - and this depends on who gets the money.
While AB 398 doesn’t say much on how it will utilize the revenue, SB-775 would rebate the majority of the money raised back to individuals through an equal per-capita dividend, or payment. This is critical. Because lower-income households consume far less carbon than higher-income households, they would likely receive more money than they pay in. In other words, SB-775 makes a regressive tax progressive – protecting the most vulnerable households across the state.
The idea of a sizable dividend has broad bi-partisan support. Back in February, elder republican statesmen including Harvard economists Martin Feldstein and Gregory Mankiw (who chaired the Council of Economic Advisers under presidents Reagan and George W. Bush, respectively), George P. Schultz (former Secretary of Labor and Secretary of State), and James A Baker III (Chief of Staff under Reagan) came out in same day OpEd articles in the New York Times and the Wall Street Journal calling for conservatives and liberals to unite behind a carbon fee-and-dividend proposal.
Allowing big oil to the table has its consequences. AB 398 allows for the free allocation of pollution permits to big business. This is little more than a give-away from the people of California to big oil. It is supposedly in the name of “competition,” but SB-775 deals with that in a fair and transparent way, bypassing the free giveaways to polluting firms. To ensure CA businesses remain competitive, SB-775 includes a border-adjustment tax. The state would levy a tax on imported goods based on their carbon content, while providing a credit to CA firms that export carbon-intensive products. This ensures that goods produced in CA are not put at a disadvantage in the national and international markets while goods imported cannot escape GHG pricing.
An issue that has many environmental justice groups particularly up in arms is how AB 398 addresses carbon offsets. To get around reducing their pollution, firms can simply pay someone else to reduce their emissions. While these offsets frequently result in out-of-state projects to reduce emissions, AB 398 would require half of the projects to take place in CA. SB-775 on the other hand has a simple solution – eliminate offsets entirely. Polluters cannot avoid buying permits or curbing their use of fossil fuels by paying someone else to clean up after them. After all, all polluters should pay a fair price for their pollution. Benefits go beyond fairness - eliminating offsets is particularly important for California residents to realize the full health benefits of reducing GHG emissions across the state.
The main political weakness of SB-775 is that nobody stands to make a killing on it. If we give most of the money back to the people, there simply isn’t enough pork left on the table to dole out.
AB 398 on the other hand is a Faustian bargain with big oil. They’ve done enough damage. Seems it’s about time for a new bargaining table.
Disclose: I had consulted on SB-775 with Sen. Wieckowski’s office
Mark Paul is a Postdoctoral Associate at the Samuel DuBois Cook Center on Social Equity at Duke University.