03/20/2013 01:58 pm ET Updated May 20, 2013

Fund Green Infrastructure, but Not With Cap-and-Trade

A dollar is a dollar, right? But when it comes to government policy, some dollars draw a lot of attention, while other funds fly under the public's radar. All dollars have the same purchasing power, but highly visible dollars have magnified political repercussions, and must be handled with care. For example, the 2009 Federal Stimulus Bill's price tag was visible to taxpayers, but the "infrastructure" it funded was mostly not. Democrats had a hard time responding to Tea Party opponents who used the "failed" stimulus to help conservatives retake the House in 2010.

The same thing could happen with California's new highly visible funds from the auction of cap-and-trade permits. The state has taken great pains to shield ratepayers from carbon price impacts on their nearly-invisible utility bills, but surprisingly they may let gas prices jump with no consumer protection.

In terms of visibility to the public, this is backwards. Very few people actually read the line items on their utility bill. Millions of households use online billing, and they are lucky to even see the total, let alone the fees, surcharges, and rebates buried in the fine print. While California's first "climate dividend" returning cap-and-trade funds to the public was a huge breakthrough, so far it only applies to the electricity sector and will be delivered on-bill, rather than as a stand-alone, attention-getting debit card.

Meanwhile, the transportation sector enters the program in 2015, meaning gas prices will go up. Unlike utility bills, gas prices are perhaps the most visible and recognizable price in America (maybe along with the price of a gallon of milk). Gas prices are broadcast on street corners throughout America, and are regularly featured on the evening news. They are a high-profile target for the public's anger, leading to "drill baby drill"-type campaigns, "gas tax holidays," and even extreme proposals to abolish state gas taxes.

In late February, the state solicited comments from the public on an Investment Plan for the Cap-and-Trade Auction Proceeds. Most of the public input suggested funding well-intentioned programs to reduce greenhouse gas emissions or build green infrastructure. Such ideas have now found a home in proposed legislation SB798 by State Senator Kevin De Leon (D-Los Angeles) to create a Green Infrastructure Bank with 50 percent of the cap-and-trade revenues.

Such a "bank" is a great idea. Revolving loan funds can help local governments pay for projects as federal funds are drying up. No doubt there is a definite need. However, there are problems with using cap-and-trade auction revenues as the source of funds. Auction proceeds will be very volatile. Multi-year infrastructure projects could easily swallow up all the revenues from cap-and-trade, yet still be unable to contribute to the state's 2020 GHG reduction goals. Government investments in capped sectors will alter the distribution of reductions from what would have resulted from the price signal alone. If those investments fail to prioritize cost-effectiveness or lower compliance costs, then the government's investments will shift reductions to different sectors under the cap, but not result in additional reductions. Such investments will not broaden bipartisan public support for a continuously increasing price on carbon, nor will it counter the attack that a carbon price is a regressive tax. Opponents will cite highly visible short-term costs to taxpayers, making long-term investments a risky political gamble.

Some investments are still a valid use of a small portion of cap-and-trade funds, but they should not dominate the investment plan. Instead, the state should return the majority of funds to consumers through a new transportation-sector dividend, which will counterbalance the highly visible price signal as petroleum is added to the cap. If it is determined that the legislature needs to pass a bill with a two-thirds majority to make that happen, then this is the right time to do it.

The state can use other sources of funds to create a Green Infrastructure Bank and proceed with many of the other well-intentioned investments by diverting funds from low-visibility carbon-intensive "brown infrastructure" spending such as road building, while the highly-visible auction proceeds are reserved for per capita dividends or rebates.

As Harvard professor Theda Skocpol recently wrote:

"Cap and dividend is simple to spell out... and it is also relatively transparent. Citizens could understand and trust this policy. Like Social Security, taxes or proceeds from auctions are collected for a separate trust fund -- and the revenues are used to pay for broadly valued benefits for each citizen and every family... Cap and dividend would allow antiglobal warming advocates to say -- loud and clear, and very truthfully -- that promoting cleaner energy will also boost the economic fortunes of average Americans... Reformers who want to remake energy use in the United States need to deliver concrete economic help to ordinary families along the way, and ideally they should do it in easy-to-understand, transparent ways."
(pgs. 125-126)